Direct improvement costs $402,000, additional indirect costs $63,000 and separate supported entrepreneurial incentive $85,000 are expressly nonoverlapping. Land is excluded. What full improvement cost new results?
Correct Answer
D) $550,000
402000+63000+85000 = 550000. Common errors: leaving out the entrepreneurial incentive gives $465,000; leaving out the indirect costs gives $487,000; reporting only the direct costs gives $402,000.
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 the nonoverlapping amounts gives $402,000 + $63,000 + $85,000 = $550,000, with land excluded as stated.
Why the Other Options Are Wrong
Option A: $402,000
Option A, $402,000, is wrong because it reports only the direct costs and omits both the $63,000 of indirect costs and the $85,000 incentive. The full total is $550,000.
Option B: $465,000
Option B, $465,000, is wrong because it adds direct and indirect costs ($402,000 + $63,000) but leaves out the $85,000 entrepreneurial incentive. Adding the incentive gives $550,000.
Option C: $487,000
Option C, $487,000, is wrong because it adds direct costs and incentive ($402,000 + $85,000) but leaves out the $63,000 of indirect costs. The full total is $550,000.
Hard plus soft plus reward
Full cost new is hard costs plus soft costs plus the developer's expected reward.
How to use: Use this check whenever a question asks for full or total improvement cost new.
Exam Tip
When a question stresses that cost components are nonoverlapping, include each one once. Leaving out any single component is the usual distractor.
Common Mistakes to Avoid
- -Treating contractor construction cost alone as full cost new
- -Omitting entrepreneurial incentive from cost new
- -Adding land value into improvement cost new when it is to be kept separate
Concept Deep Dive
Analysis
This question tests what full improvement cost new includes. Full economic cost includes direct costs, indirect costs and a market-supported entrepreneurial incentive. Because the three amounts are stated to be nonoverlapping and land is excluded, they are simply added: $402,000 + $63,000 + $85,000 = $550,000.
Background Knowledge
Direct (hard) costs are labor and materials; indirect (soft) costs include items such as fees, financing and carrying costs; entrepreneurial incentive is the reward a developer expects for taking on the project. Full economic cost new includes all of these when they are market supported.
Real-World Application
An appraiser estimating replacement cost for a new house collects contractor bids for construction, adds architectural fees, permits and construction financing, and then adds a market-supported builder's incentive. The sum is used as cost new before depreciation.
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
The improvements consist of two component groups that do not overlap, with costs new of $40,000 and $610,000. The first group is fully depreciated; the second has total depreciation of 20%. No other loss applies, and the site is valued at $170,000. What value does the cost approach indicate?
Next Question
An improvement with an effective age of 20 years has 20% total depreciation, all on a straight-line basis. What average annual percentage of original cost does that represent?