Improvement base costs total $500,000 and explicitly exclude entrepreneurial incentive. Add a supported incentive 10% of that base. Total depreciation $60,000 is expressly measured for the full resulting cost including incentive. Add site $200,000. What indication results?
Correct Answer
C) $690,000
500000+500000×0.10−60000+200000 = 690000. Common errors: leaving out the 10% entrepreneurial incentive gives $640,000; leaving out the site value gives $490,000; not deducting the depreciation gives $750,000.
Why This Is the Correct Answer
Option C is correct because the incentive is $500,000 x 0.10 = $50,000, making full cost new $550,000. Deducting the $60,000 of depreciation leaves $490,000, and adding the $200,000 site gives $690,000.
Why the Other Options Are Wrong
Option A: $490,000
Option A, $490,000, leaves out the site value: $500,000 x 1.10 - $60,000 = $490,000. Adding the $200,000 site gives $690,000.
Option B: $640,000
Option B, $640,000, leaves out the 10% incentive: $500,000 - $60,000 + $200,000 = $640,000. Including the $50,000 incentive gives $690,000.
Option D: $750,000
Option D, $750,000, does not deduct the depreciation: $500,000 x 1.10 + $200,000 = $750,000. Deducting the $60,000 gives $690,000.
Add Incentive, Then Subtract
Grow the base by the incentive first, take off depreciation measured on that full figure, then add the land.
How to use: Use this order when an incentive and a depreciation amount appear in the same question.
Exam Tip
Check that the depreciation base in the stem matches the cost figure you deduct it from.
Common Mistakes to Avoid
- -Leaving out the entrepreneurial incentive
- -Forgetting to add the site value
- -Not deducting the stated depreciation
Concept Deep Dive
Analysis
This question tests adding an incentive to a stated base, then deducting depreciation measured on the full cost, then adding the site. The 10% incentive applies to the $500,000 base, and the $60,000 depreciation already reflects the full cost.
Background Knowledge
Full economic cost includes market-supportable entrepreneurial profit along with direct and indirect costs. Depreciation must be measured on the same cost basis it is deducted from, so the stem's statement that it covers the full cost including incentive matters.
Real-World Application
An appraiser builds cost new for a newly built fourplex, adding a 10 percent developer incentive to the hard and soft costs. She deducts depreciation measured on that full figure and adds land value from sales of similar lots zoned for two to four units.
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