Direct and indirect improvement costs total $340,000, excluding entrepreneurial incentive. The separately supported incentive is 12% of that stated base and is not included elsewhere. What total improvement cost new results?
Correct Answer
C) $380,800
340000×1.12 = 380800. Common errors: leaving out the entrepreneurial incentive gives $340,000; reporting only the incentive gives $40,800; grossing up by dividing by 0.88 instead of adding 12% of the base gives $386,364.
Why This Is the Correct Answer
Option C is correct because the incentive is 12% of the stated $340,000 base, or $40,800. Adding it to the base gives $340,000 x 1.12 = $380,800 of total improvement cost new.
Why the Other Options Are Wrong
Option A: $40,800
Option A, $40,800, is only the incentive: $340,000 x 0.12 = $40,800. The question asks for total cost new, which is $340,000 + $40,800 = $380,800.
Option B: $340,000
Option B, $340,000, leaves out the entrepreneurial incentive entirely. Adding the supported 12% incentive gives $380,800.
Option D: $386,364
Option D, $386,364, grosses up by dividing: $340,000 / 0.88 = $386,364. That would make the incentive 12% of the total rather than 12% of the stated base; the correct figure is $340,000 x 1.12 = $380,800.
Percent Of What
Ask: percent of what? If it is a percent of the base, multiply the base by one plus the rate.
How to use: Use this question whenever an incentive or fee is given as a percentage.
Exam Tip
Read whether the percentage applies to the stated base or to the final total. That one detail separates the multiply and divide answers.
Common Mistakes to Avoid
- -Reporting the incentive alone as total cost
- -Dividing by one minus the rate when the rate applies to the base
- -Leaving out a supported incentive
Concept Deep Dive
Analysis
This question tests applying an entrepreneurial incentive stated as a percentage of a given cost base. The incentive is 12% of the $340,000 base, so multiply the base by 1.12. Dividing by 0.88 would compute a different, gross-up percentage.
Background Knowledge
Entrepreneurial incentive is the market-supported reward a developer expects for the effort and risk of a project. It may be expressed as a percentage of different bases, so the appraiser must apply it to the base the evidence specifies.
Real-World Application
An appraiser learns from local developers that they expect a profit of about 12 percent of direct and indirect costs. She multiplies her cost estimate by 1.12 to reach full cost new.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Previous Question
Which is the basic cost-approach summation?
Next Question
Improvement cost new is $485,000. Separately supported improvement depreciation deductions of $97,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?