Question

You own a house that you rent for $1,200 a month. The maintenance expenses on the house average $200 a month. The house cost $89,000 when you purchased it several years ago. A recent appraisal on the house valued it at $210,000. The annual property taxes are $5,000. If you sell the house you will incur $20,000 in expenses. 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?

$89,000

$120,000

$185,000

$190,000

$210,000

Answer 1

$190,000

Step-by-step explanation:

If I decide to use my house as a professional office, the value or cost is the opportunity cost which implies the benefit of a forgone alternative.

The house was purchased for $89,000 and rent of $1200 is being received for many years, so we can assume that the cost of purchasing the house has been fully recovered. So the opportunity cost here is the current market price of the house.

Current value = $210,000

Selling expenses = $20,000

Opportunity cost = 210000 - 20000 = $190,000