Nonoverlapping improvement costs are direct $385,000, indirect $55,000 and a separately supported entrepreneurial incentive $72,000 not otherwise included. Land is excluded. What full cost new results?
Correct Answer
D) $512,000
385000+55000+72000 = 512000. Common errors: leaving out the entrepreneurial incentive gives $440,000; leaving out the indirect costs gives $457,000; reporting only the direct costs gives $385,000.
Why This Is the Correct Answer
Option D is correct because full economic cost includes all direct and indirect costs plus market-supportable entrepreneurial profit. The three nonoverlapping pieces add to $385,000 + $55,000 + $72,000 = $512,000. Land is excluded, so nothing else is added.
Why the Other Options Are Wrong
Option A: $385,000
Option A, $385,000, reports only the direct costs. Full cost also requires the $55,000 of indirect costs and the $72,000 incentive, for $512,000.
Option B: $440,000
Option B, $440,000, is $385,000 + $55,000, which leaves out the $72,000 entrepreneurial incentive. Including it gives $512,000.
Option C: $457,000
Option C, $457,000, is $385,000 + $72,000, which leaves out the $55,000 of indirect costs. Including all three pieces gives $512,000.
Direct plus indirect plus incentive
Full cost new stacks three layers: direct, indirect and supported entrepreneurial incentive. Drop any layer and the total is too low.
How to use: Use this three-layer check whenever a question asks for full cost new of improvements.
Exam Tip
Note whether land is excluded or included; improvement-only cost leaves out site value. Each wrong option here drops one of the three layers.
Common Mistakes to Avoid
- -Leaving out entrepreneurial incentive when it is supported
- -Forgetting indirect costs such as fees and financing
- -Adding land value to an improvement-only cost
Concept Deep Dive
Analysis
This question tests the components of full cost new for improvements. Full cost includes direct costs, indirect costs and a supported entrepreneurial incentive when not already included. Land is excluded, so the answer is the sum of the three improvement cost pieces.
Background Knowledge
Direct (hard) costs are the labor, materials and contractor costs of construction, and indirect (soft) costs include items such as fees, financing and insurance. Entrepreneurial incentive is the market-supported reward a developer expects for taking on the project. Together these make up full cost new of the improvements.
Real-World Application
An appraiser estimating cost new for a newly built custom house gathers contractor bids for direct costs, adds design fees and construction loan interest as indirect costs, and adds a builder incentive supported by recent projects in the market.
More Cost Approach Questions
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A supported whole-property external loss is $28,000. Independent allocation evidence expressly assigns 70% of the LOSS to improvements and 30% to site. What improvement loss results? Do not infer the allocation solely from a land/value ratio.