John and Jane Brown have been living at their present home for the past 6 years....

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Finance

John and Jane Brown have been living at their present home forthe past 6 years. During that time, they have replaced the waterheater for $375, have replaced the dishwasher for $599, and havehad to make miscellaneous repair and maintenance expenditures ofapproximately $1,500. They have decided to move out and rent thehouse for $975 per month. Newspaper advertising will cost $75. Johnand Jane intend to paint the interior of the home and power-washthe exterior. They estimate that that will run about $900.The houseshould be ready to rent after that. In reviewing the financialsituation, John views all the expenditures as being relevant, so heplans to net out the estimated expenditures discussed above fromthe rental income. Do John and Jane understand the differencebetween sunk costs and opportunity costs? Explain the two conceptsto them. Which of the expenditures should be classified as sunkcash flows, and which should be viewed as opportunity cashflows?

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SUNK COSTIt is the cost which has already been incurred in the past and no future decision can change it because it has been occurred in the past and we cannot recover it no matter what the outcome is and is thus it is an irrelevant cost OPPORTUNITY COSTIt is the next best alternative cost and it is a relevant cost as it is different under different alternatives and has implication on the See Answer

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John and Jane Brown have been living at their present home forthe past 6 years. During that time, they have replaced the waterheater for $375, have replaced the dishwasher for $599, and havehad to make miscellaneous repair and maintenance expenditures ofapproximately $1,500. They have decided to move out and rent thehouse for $975 per month. Newspaper advertising will cost $75. Johnand Jane intend to paint the interior of the home and power-washthe exterior. They estimate that that will run about $900.The houseshould be ready to rent after that. In reviewing the financialsituation, John views all the expenditures as being relevant, so heplans to net out the estimated expenditures discussed above fromthe rental income. Do John and Jane understand the differencebetween sunk costs and opportunity costs? Explain the two conceptsto them. Which of the expenditures should be classified as sunkcash flows, and which should be viewed as opportunity cashflows?