A development budget consists of direct costs of $720,000, indirect costs of $95,000, site cost of $180,000 and a separate entrepreneurial incentive of $85,000, with no overlap among them. What is the total development cost, including the site?
Correct Answer
C) $1,080,000
720000+95000+180000+85000 = 1080000. Common errors: leaving out the indirect costs gives $985,000; leaving out the entrepreneurial incentive gives $995,000; counting the site twice gives $1,260,000.
Why This Is the Correct Answer
Option C is correct because development cost includes all direct and indirect costs plus the cost of the land and the entrepreneurial profit. $720,000 + $95,000 + $180,000 + $85,000 = $1,080,000. Each component is nonoverlapping, so each is counted once.
Why the Other Options Are Wrong
Option A: $985,000
Option A, $985,000, is $720,000 + $180,000 + $85,000, which leaves out the $95,000 of indirect costs. Including them gives $1,080,000.
Option B: $995,000
Option B, $995,000, is $720,000 + $95,000 + $180,000, which leaves out the $85,000 entrepreneurial incentive. Including it gives $1,080,000.
Option D: $1,260,000
Option D, $1,260,000, is $720,000 + $95,000 + ($180,000 x 2) + $85,000, which counts the site twice. The site is included once, for $1,080,000.
Development cost includes dirt
Development cost is everything: direct, indirect, land and profit. Improvement cost leaves the land out.
How to use: Use this to decide whether site value belongs in a cost total.
Exam Tip
Look for words like all-in or development cost, which signal that land is included. Count each component exactly once.
Common Mistakes to Avoid
- -Leaving land out of a development cost total
- -Omitting entrepreneurial incentive
- -Counting the land cost twice
Concept Deep Dive
Analysis
This question tests the definition of development cost, which differs from improvement-only cost because it includes land. Development cost is the all-inclusive total of direct costs, indirect costs, land and entrepreneurial profit. Add each of the four stated pieces once.
Background Knowledge
Development cost is the all-inclusive cost to develop a property, including direct and indirect costs, land cost and entrepreneurial profit. Improvement cost new, by contrast, excludes land. Knowing which total a question asks for decides whether site value is part of the sum.
Real-World Application
A builder asks an appraiser to compare the total cost of building a speculative house with its expected market value. The appraiser sums lot acquisition, construction costs, soft costs and a market-supported builder's incentive to estimate total development cost.
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