Leaving out entrepreneurial profit in the cost approach will most likely result in:

• A. A distortion of the cost approach conclusion
• B. An accurate reflection of market conditions
• C. No impact on the conclusion
• D. An overstatement of depreciation

Answer: (A)

In the cost approach, total value is tied to the current cost to replace or reproduce the improvements, plus land value, minus depreciation, and crucially, it includes the entrepreneurial profit that a builder would expect for undertaking the project. Leaving out this profit means you’re understating the true cost to construct today. Since the cost approach bases value on that cost, omitting entrepreneurial profit leads to a value conclusion that doesn’t reflect what buyers would actually pay—therefore the conclusion is distorted. Depreciation is a separate deduction for wear and aging and isn’t caused by omitting profit, and market conditions aren’t accurately mirrored if profit is ignored.