The improvement budget has direct costs $365,000, indirect costs $48,000, and an additional supported entrepreneurial incentive $67,000 not already included in either. Land is separate. What full improvement cost new results?
Correct Answer
D) $480,000
365000+48000+67000 = 480000. Common errors: leaving out the entrepreneurial incentive gives $413,000; leaving out the indirect costs gives $432,000; reporting only the direct costs gives $365,000.
Why This Is the Correct Answer
Option D is correct because full economic cost includes all direct and indirect costs plus market-supported entrepreneurial profit or incentive: $365,000 + $48,000 + $67,000 = $480,000.
Why the Other Options Are Wrong
Option A: $365,000
Option A, $365,000, reports only the direct costs. It omits the $48,000 indirect costs and the $67,000 entrepreneurial incentive; the full total is $480,000.
Option B: $413,000
Option B, $413,000, adds direct and indirect costs ($365,000 + $48,000) but leaves out the $67,000 entrepreneurial incentive. Including it gives $480,000.
Option C: $432,000
Option C, $432,000, adds direct costs and incentive ($365,000 + $67,000) but leaves out the $48,000 indirect costs. Including them gives $480,000.
Direct, indirect, incentive
Full cost new has three parts: direct, indirect and incentive. Land stays outside.
How to use: Use this three-part list to check that a cost new figure is complete.
Exam Tip
Watch for wording that says the incentive is or is not already included. If it is separate, add it; if it is already in the budget, do not add it twice.
Common Mistakes to Avoid
- -Omitting entrepreneurial incentive from cost new
- -Leaving out indirect costs
- -Including land value in improvement cost new
Concept Deep Dive
Analysis
This question tests what is included in full improvement cost new. Full economic cost combines direct costs, indirect costs and entrepreneurial incentive. Since the incentive is stated as not already included, all three amounts are added.
Background Knowledge
The cost approach should reflect full economic cost: direct costs, indirect costs and a market-supported entrepreneurial profit or incentive. The appraiser must account for all direct and indirect costs of constructing the improvements. Land is valued separately and is not part of improvement cost.
Real-World Application
An appraiser valuing a newly built home adds the builder's labor and materials, the indirect costs and a market-supported developer incentive. The site value from land sales is added later, separately from the improvement cost.
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Previous Question
The only soft costs in a construction budget are architecture/engineering $27,000, construction financing interest $19,000, permits/impact fees $8,500 and construction-period property taxes $6,500. What is the total soft cost?
Next Question
The subject is a single-family residence whose improvements have a current cost new of $720,000, an effective age of 18 years, and a total economic life of 72 years. The site value of $248,000 already reflects any site influences. Using the straight-line age-life method, with no salvage value or other deductions, what is the total indicated value, including the site?