Direct improvement costs are $430,000. Additional soft costs are 12% of direct, and separate entrepreneurial incentive is $38,400. None overlap. Supported total improvement depreciation $110,000 applies to the complete cost. Add site $200,000. What total indication results?
Correct Answer
D) $610,000
430000×1.12+38400−110000+200000 = 610000. Common errors: leaving out the site value gives $410,000; leaving out the entrepreneurial incentive gives $571,600; leaving out the 12% soft costs gives $558,400.
Why This Is the Correct Answer
Option D is correct because soft costs are $430,000 × 12% = $51,600, so full cost new is $430,000 + $51,600 + $38,400 = $520,000. Deducting $110,000 of depreciation and adding $200,000 of site gives $520,000 − $110,000 + $200,000 = $610,000. Full economic cost includes direct and indirect costs plus market-supportable entrepreneurial profit.
Why the Other Options Are Wrong
Option A: $410,000
Option A is wrong because $410,000 is $430,000 × 1.12 + $38,400 − $110,000, which leaves out the $200,000 site value. Adding the site gives $610,000.
Option B: $558,400
Option B is wrong because $558,400 is $430,000 + $38,400 − $110,000 + $200,000, which leaves out the 12% soft costs of $51,600. Including them gives $610,000.
Option C: $571,600
Option C is wrong because $571,600 is $430,000 × 1.12 − $110,000 + $200,000, which leaves out the $38,400 entrepreneurial incentive. Including it gives $610,000.
Hard, soft, incentive, then subtract
Build cost new from hard costs, soft costs and incentive first, then subtract depreciation and add site.
How to use: Use this order to make sure each cost component is included before you deduct depreciation.
Exam Tip
When soft costs are given as a percentage, compute them on the base the stem names, here direct costs, before adding the separate incentive.
Common Mistakes to Avoid
- -Leaving entrepreneurial incentive out of cost new
- -Forgetting to add soft costs calculated as a percentage of direct costs
- -Omitting the site value from the final indication
Concept Deep Dive
Analysis
This question tests building up full cost new from direct costs, soft costs and entrepreneurial incentive before deducting depreciation and adding site. Soft costs are a percentage of direct costs, and the incentive is a separate dollar amount. The stated depreciation applies to the complete cost, so it is subtracted after the full buildup.
Background Knowledge
Full economic cost new includes direct (hard) costs, indirect (soft) costs such as fees and financing, and a market-supported entrepreneurial incentive or profit. Depreciation is then deducted from the complete cost new, and site value is added to reach the cost approach indication. Omitting any component understates cost new.
Real-World Application
An appraiser developing a cost approach for a newer custom home obtains the builder's direct costs, adds architectural, permit and financing costs, and includes a market-supported developer incentive. After deducting supported depreciation, the appraiser adds the site value from recent lot sales.
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