Why does the cost approach include entrepreneurial incentive?
Correct Answer
C) A developer would not build without expected profit above costs
Why this is correct: Entrepreneurial incentive (or profit) is included in the cost approach because a developer expects a profit for undertaking the risk and effort of development. The cost to create a property includes not just hard costs but also this market-derived profit; otherwise, no one would build. Why the other choices are wrong: 'It is the appraiser's fee for the assignment' is unrelated. 'It reimburses the lender for its construction-loan interest carry' describes financing costs, which are separate. 'It offsets depreciation claimed elsewhere' is incorrect; depreciation is deducted after cost new is established. Exam tip: Cost new = Direct Costs + Indirect Costs + Entrepreneurial Incentive. Profit is a cost of production, not an optional extra.
Why This Is the Correct Answer
Why this is correct: Entrepreneurial incentive (or profit) is included in the cost approach because a developer expects a profit for undertaking the risk and effort of development. The cost to create a property includes not just hard costs but also this market-derived profit; otherwise, no one would build. Why the other choices are wrong: 'It is the appraiser's fee for the assignment' is unrelated. 'It reimburses the lender for its construction-loan interest carry' describes financing costs, which are separate. 'It offsets depreciation claimed elsewhere' is incorrect; depreciation is deducted after cost new is established. Exam tip: Cost new = Direct Costs + Indirect Costs + Entrepreneurial Incentive. Profit is a cost of production, not an optional extra.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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