Direct and indirect costs total $520,000 and explicitly exclude entrepreneurial incentive. Add a supported 10% of that stated base once. Land is excluded. What improvement cost new results?
Correct Answer
C) $572,000
520000×1.10 = 572000. Common errors: leaving out the entrepreneurial incentive gives $520,000; reporting only the incentive gives $52,000; grossing up by dividing by 0.90 instead of adding 10% of the base gives $577,778.
Why This Is the Correct Answer
Option C is correct because 10% of $520,000 is $52,000, and $520,000 + $52,000 = $572,000. Full economic cost includes market-supported entrepreneurial profit along with direct and indirect costs.
Why the Other Options Are Wrong
Option A: $52,000
Option A, $52,000, is $520,000 x 0.10, only the entrepreneurial incentive. Cost new adds it to the base: $520,000 x 1.10 = $572,000.
Option B: $520,000
Option B, $520,000, is the direct and indirect cost base alone, which leaves out the entrepreneurial incentive. Adding 10% gives $572,000.
Option D: $577,778
Option D, $577,778, comes from $520,000 / 0.90, a gross-up that makes incentive 10% of the total rather than 10% of the stated base. The stem says to add 10% of the base, giving $572,000.
Percent of base means multiply
When incentive is a percent of the stated base, multiply the base by one plus the rate; dividing is only for a percent of the total.
How to use: Use this to pick between a markup and a gross-up.
Exam Tip
Read what base the percentage applies to before computing; that one phrase decides between multiplying and dividing.
Common Mistakes to Avoid
- -Leaving out entrepreneurial incentive from cost new
- -Grossing up by dividing when the rate applies to the base
- -Reporting only the incentive amount
Concept Deep Dive
Analysis
This question tests adding entrepreneurial incentive to direct and indirect costs. The incentive is stated as 10% of the $520,000 base, added once, so the arithmetic is a simple markup on the base, not a gross-up.
Background Knowledge
Full economic cost includes direct costs, indirect costs and a market-supported entrepreneurial incentive or profit. How the incentive is expressed, as a percentage of a cost base or of total value, controls the arithmetic.
Real-World Application
A developer's budget shows hard and soft costs but no profit line. The appraiser adds a market-supported incentive at a percentage of those costs to reach full cost new.
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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?
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