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?
Correct Answer
D) $563,000
418000+67000+78000 = 563000. Common errors: leaving out the entrepreneurial incentive gives $485,000; leaving out the indirect costs gives $496,000; reporting only the direct costs gives $418,000.
Why This Is the Correct Answer
Option D is correct because $418,000 + $67,000 + $78,000 = $563,000. Full economic cost includes direct and indirect costs plus market-supportable entrepreneurial profit. The stem states the incentive is excluded from the other figures, so adding it does not double count.
Why the Other Options Are Wrong
Option A: $418,000
Option A is wrong because $418,000 is only the direct costs. Adding the $67,000 indirect costs and $78,000 incentive gives $563,000.
Option B: $485,000
Option B is wrong because $485,000 leaves out the entrepreneurial incentive: $418,000 + $67,000 = $485,000. Adding the separately supported $78,000 gives $563,000.
Option C: $496,000
Option C is wrong because $496,000 leaves out the indirect costs: $418,000 + $78,000 = $496,000. Adding the $67,000 indirect costs gives $563,000.
Direct, indirect, incentive
Full cost new has three parts: direct plus indirect plus entrepreneurial incentive, each counted once.
How to use: Use this when a question asks for full improvement cost new from listed cost components.
Exam Tip
Check whether the incentive is already inside another figure. If the stem says it is not, add it.
Common Mistakes to Avoid
- -Leaving entrepreneurial incentive out of full cost
- -Forgetting indirect costs
- -Adding the incentive when it is already included elsewhere
Concept Deep Dive
Analysis
This question tests full improvement cost new, which adds direct costs, indirect costs and market-supported entrepreneurial incentive. Since the stem says the incentive is not included in the other costs and nothing is double counted, all three are summed. The total is $418,000 + $67,000 + $78,000 = $563,000.
Background Knowledge
Direct costs cover labor, materials and contractor overhead and profit. Indirect costs include items such as fees, permits and financing, and entrepreneurial profit or incentive is the market-expected return to the developer for expertise and risk.
Real-World Application
An appraiser builds cost new for a newly built single-family house from contractor bids, soft-cost estimates and a market-supported builder incentive. Adding all three gives the full cost new used in the cost approach.
More Cost Approach Questions
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Previous Question
The subject improvements have hard costs of $300,000 and soft costs of $45,000. These amounts do not overlap and include all required improvement costs. Total depreciation is estimated at 20% of their sum, and the site is valued at $175,000. What value does the cost approach indicate?
Next Question
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?