Question

6. You are considering remodeling your kitchen, where the estimated cost is $45,000. Your realtor friend has told you that it will immediately increase the value of your house by about 90% of the remodeling cost. Experts say that on average, the value of houses in your area will appreciate by about 5% annually. If your opportunity cost is 3.5%, and you plan to sell the house in 6 years, is it a good investment to remodel the kitchen?  

Answer 1

Given,

Remodeling estimated Cost = $45,000

Increase in Value = 90% of remodeling cost

Appreciation in value of house = 5% annually

Opportunity cost = 3.5%

Sell house in 6 years

Future value of development:

= $45,000*90%*(1+5%)^6

= $54,273.87

Required future value of development:

= $45,000*(1+3.50%)^6

= $55,316.49

It is not a good investment as actual Future value of development ($54,273.87) is less than Required future value of development ($55,316.49).

Please give thumbs up. It will help me.