Direct and indirect improvement costs including contractor overhead/profit total $475,000, explicitly excluding entrepreneurial incentive. Separate supported incentive is 12% of that base. What full improvement cost new results?
Correct Answer
C) $532,000
475000×1.12 = 532000. Common errors: leaving out the entrepreneurial incentive gives $475,000; reporting only the incentive gives $57,000; grossing up by dividing by 0.88 instead of adding 12% of the base gives $539,773.
Why This Is the Correct Answer
Option C is correct because full improvement cost new includes direct and indirect costs plus a market-supported entrepreneurial incentive. The incentive is 12% of $475,000, or $57,000, so the total is $475,000 × 1.12 = $532,000.
Why the Other Options Are Wrong
Option A: $57,000
Option A, $57,000, reports only the incentive: $475,000 × 0.12 = $57,000. The question asks for full cost new, which is $475,000 + $57,000 = $532,000.
Option B: $475,000
Option B, $475,000, leaves out the entrepreneurial incentive. The base explicitly excludes it, so the 12% must be added: $475,000 × 1.12 = $532,000.
Option D: $539,773
Option D, $539,773, grosses up by dividing by 0.88: $475,000 ÷ 0.88 = $539,773. The stem states the incentive as 12% of the base, so the result is $475,000 × 1.12 = $532,000.
Contractor Profit Isn't Developer Incentive
Contractor profit is part of the building cost; the developer's incentive is a separate layer added on top.
How to use: Use this to avoid omitting incentive when a base already includes contractor profit.
Exam Tip
If the cost base explicitly excludes entrepreneurial incentive, add it at the stated rate on that base.
Common Mistakes to Avoid
- -Treating contractor profit as entrepreneurial incentive
- -Grossing up when the rate is stated on the base
- -Reporting the incentive alone as the answer
Concept Deep Dive
Analysis
This question tests adding entrepreneurial incentive to a cost base that already includes contractor overhead and profit. The incentive is separate from the contractor's profit and is stated as 12% of the base, so it is added on top of that base.
Background Knowledge
Contractor overhead and profit is an indirect cost of construction, while entrepreneurial incentive is the developer's reward for risk and coordination. Full economic cost includes all direct and indirect costs plus market-supportable entrepreneurial profit. The two profit items are separate and both may belong in cost new.
Real-World Application
A cost service shows $475,000 in direct and indirect costs including the builder's overhead and profit. Interviews with local developers support a 12% incentive, so the appraiser reports $532,000 as full cost new.
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