Direct costs including contractor overhead/profit are $420,000. Additional indirect costs are $65,000 and separately supported entrepreneurial incentive $55,000, not already counted. Land is separate and excluded from this question. What improvement cost new results?
Correct Answer
D) $540,000
420000+65000+55000 = 540000. Common errors: leaving out the entrepreneurial incentive gives $485,000; leaving out the indirect costs gives $475,000; reporting only the direct costs gives $420,000.
Why This Is the Correct Answer
Option D is correct because $420,000 + $65,000 + $55,000 = $540,000. Contractor overhead and profit are already inside the direct costs, while the indirect costs and the entrepreneurial incentive are not already counted. Full economic cost includes all three, and land is not part of improvement cost.
Why the Other Options Are Wrong
Option A: $420,000
Option A is wrong because $420,000 reports only the direct costs. Adding the $65,000 indirect costs and $55,000 incentive gives $540,000.
Option B: $475,000
Option B is wrong because $475,000 leaves out the indirect costs: $420,000 + $55,000 = $475,000. Adding the $65,000 indirect costs gives $540,000.
Option C: $485,000
Option C is wrong because $485,000 leaves out the entrepreneurial incentive: $420,000 + $65,000 = $485,000. Adding the separately supported $55,000 gives $540,000.
Contractor profit is direct
Contractor profit sits inside direct costs; developer incentive is a separate layer added on top.
How to use: Use this when a question mentions both contractor profit and entrepreneurial incentive.
Exam Tip
Do not confuse contractor's overhead and profit with entrepreneurial incentive. They are different and can both belong in full cost.
Common Mistakes to Avoid
- -Treating contractor profit and entrepreneurial incentive as the same thing
- -Leaving out indirect costs
- -Including land value in improvement cost new
Concept Deep Dive
Analysis
This question tests building full improvement cost new from components. Direct costs already include contractor overhead and profit, so only the indirect costs and separately supported entrepreneurial incentive are added. The total is $420,000 + $65,000 + $55,000 = $540,000, with land excluded.
Background Knowledge
Contractor's overhead and profit is a direct cost, while entrepreneurial profit is a separate return to the developer for expertise and risk. Full economic cost includes direct costs, indirect costs and market-supportable entrepreneurial profit.
Real-World Application
A builder's bid of $420,000 includes the contractor's markup, and the appraiser adds $65,000 of soft costs and a $55,000 market-supported developer incentive. The resulting $540,000 is the improvement cost new before depreciation and site value.
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Previous Question
Direct improvement costs $418,000 and indirect costs $67,000 explicitly exclude the separately supported entrepreneurial incentive $78,000. No item is included twice. What improvement cost new results?
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Improvement cost new is $520,000. Separately supported improvement depreciation deductions of $95,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $110,000, already reflecting any site losses. What total indicated value results?