Direct improvement costs are $445,000, indirect costs $78,000, and additional supported entrepreneurial incentive $87,000 not already included. Land is excluded. What full improvement cost new results?
Correct Answer
D) $610,000
445000+78000+87000 = 610000. Common errors: leaving out the entrepreneurial incentive gives $523,000; leaving out the indirect costs gives $532,000; reporting only the direct costs gives $445,000.
Why This Is the Correct Answer
Option D is correct because full improvement cost new includes direct costs, indirect costs and supported entrepreneurial incentive. Adding $445,000 + $78,000 + $87,000 gives $610,000. Land is excluded, so nothing else is added.
Why the Other Options Are Wrong
Option A: $445,000
Option A, $445,000, reports only the direct costs. It omits the $78,000 of indirect costs and the $87,000 incentive; the full total is $445,000 + $78,000 + $87,000 = $610,000.
Option B: $523,000
Option B, $523,000, leaves out the entrepreneurial incentive: $445,000 + $78,000 = $523,000. The supported $87,000 incentive must be added to reach $610,000.
Option C: $532,000
Option C, $532,000, leaves out the indirect costs: $445,000 + $87,000 = $532,000. Adding the $78,000 of indirect costs gives the correct $610,000.
Direct, Indirect, Incentive
Full cost new has three layers: Direct, Indirect and Incentive. If one of the three is missing, the cost is incomplete.
How to use: Use this checklist to confirm all three cost layers are in your total.
Exam Tip
Look for wording such as not already included or nonoverlapping, which signals that each listed component should be added once.
Common Mistakes to Avoid
- -Treating direct construction costs alone as full cost new
- -Omitting entrepreneurial incentive when the market supports it
- -Forgetting indirect costs such as fees and permits
Concept Deep Dive
Analysis
This question tests whether the candidate knows the components of full economic cost new for improvements. Direct costs, indirect costs and a supported entrepreneurial incentive are all included when they do not overlap. Simply add the three stated amounts.
Background Knowledge
Full economic cost includes all direct costs (labor and materials), all indirect costs (such as fees, permits and construction-period financing) and market-supportable entrepreneurial profit or incentive. Leaving out any component understates cost new.
Real-World Application
An appraiser valuing a newly built house receives the builder's hard-cost budget and a separate list of soft costs. She adds both and then adds a market-supported builder incentive drawn from interviews with local builders.
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
An appraiser trends a $420,000 historical construction cost by an appropriate index multiplier of 1.25, with the construction scope unchanged. Total depreciation of the improvements is $75,000, and site value is $95,000. What value is indicated?
Next Question
The subject is a dwelling with improvement cost new of $530,000 and site value of $135,000. Its effective age is 12 years and its total economic life is 60 years. Three recent sales of highly comparable dwellings in the same subdivision indicate, by market extraction, total depreciation of 30% of improvement cost new, and the appraiser judges this sales evidence to be adequate. What is the most reliable value indication by the cost approach?