Question

You own a house that you rent for $1,475 per month. The maintenance expenses on the house average $275 per month. The house cost $234,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $256,000. If you sell the house you will incur $20,480 in real estate fees. The annual property taxes are $3,250. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

Answer 1

Answer: $235,520 is the value that we should place on this house when analyzing the option of using it as a professional office.

Explanation:

Opportunity costs are a vital part and should be considered as the relevant cash flows of the project. All the important data regarding the cash flows must be pondered upon as  it might influence the cash flows while evaluating project decisions.

Here,

Incremental cash flow =  Appraisal on the house - real estate fees

= $256,000 - $20,480

= $235,520

∴ $235,520 is the value that we should place on this house when analyzing the option of using it as a professional office.