Installed direct construction costs of the improvements total $400,000. Indirect costs of $60,000 are not included in that figure, and together the two amounts cover all required cost components. Land is excluded. What is the full cost new of the improvements?
Correct Answer
D) $460,000
400000+60000 = 460000. Common errors: leaving out the indirect costs gives $400,000; subtracting the indirect costs instead of adding them gives $340,000; treating the $60,000 as 6% of the base gives $424,000.
Why This Is the Correct Answer
Option D is correct because full improvement cost must account for all direct and indirect costs. The $60,000 of indirect costs is explicitly not in the $400,000 direct base, so $400,000 + $60,000 = $460,000. With all required components covered and land excluded, that is the full cost new.
Why the Other Options Are Wrong
Option A: $340,000
Option A, $340,000, is $400,000 - $60,000, which subtracts the indirect costs instead of adding them. Indirect costs are part of cost, so the total is $460,000.
Option B: $400,000
Option B, $400,000, reports the direct costs alone and leaves out the $60,000 of indirect costs. Full cost new is $460,000.
Option C: $424,000
Option C, $424,000, is $400,000 x 1.06, which treats the $60,000 as 6% of the base. The indirect cost is a stated $60,000 dollar amount, so the total is $460,000.
Indirect costs add on
Indirect costs are real costs of building, so they are added to direct costs, not subtracted.
How to use: Use this when a question gives direct costs and separately stated indirect costs.
Exam Tip
Read whether an indirect cost is given as a dollar amount or a percentage before computing. Confirm it is not already embedded in the base.
Common Mistakes to Avoid
- -Omitting indirect costs from cost new
- -Subtracting indirect costs instead of adding them
- -Treating a dollar amount as a percentage
Concept Deep Dive
Analysis
This question tests adding separate indirect costs to direct costs to reach full improvement cost new. The $60,000 is stated as a dollar amount not included in the base, so it is added once. Land is excluded.
Background Knowledge
Indirect costs such as fees, permits, insurance and financing during construction are part of the cost of producing an improvement. When a cost source excludes them, the appraiser adds them separately. Full cost new of improvements excludes land value.
Real-World Application
An appraiser uses a cost manual that reports direct building costs only. The appraiser adds permit fees, architectural fees and construction loan interest as indirect costs to reach full cost new before estimating depreciation.
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Previous Question
A construction budget classifies labor of $280,000, materials of $145,000 and contractor overhead/profit of $48,000 as hard costs. No other budget items are hard costs. What is the total hard cost?
Next Question
Four construction components, with no overlap among them, cost $55,000, $142,000, $88,000 and $126,000. Soft costs of $79,000 are additional. The improvements have an effective age of 15 years and a total economic life of 75 years. Using straight-line age-life depreciation on the full cost, with no salvage value, other losses or site value, what is the depreciated cost?