The Cost Approach values assets based on the cost to reproduce (create a replica) or replace (create an asset with the same or similar utility) the asset under consideration. The Cost Approach is generally more applicable when the intangible asset is relatively new and/or could be exchanged or substituted for another similar intangible asset.

The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost).

From the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.

Four general cost components should be considered under the Cost Approach:

• Direct Costs – includes costs related to material, labour, and overhead costs incurred directly by the intangible asset creator. 
• Indirect Costs – includes costs related to material, labour, and overhead costs but are specific to expenditures related to contractors, consultants, and independent professionals that are outside the intangible asset creator’s organization.
• Developer’s Profit –includes the intangible asset creator’s expected return associated with reproducing or recreating the intangible asset. This would also include consideration of whether the incurred expenses are financed by external sources or by the intangible asset creator directly. Typically, the higher rate of return is assigned to the cost financed directly by the creator.
• Entrepreneurial Incentive – includes the amount of economic benefit required to motivate the intangible asset creator to proceed into the development process. From the perspective of the creator, the entrepreneurial incentive is often perceived as an opportunity cost (i.e., forgone income).