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Homework answers / question archive / Three years ago, you could have sold your first home to purchase a second home but instead, kept your first home and took out a greater mortgage to purchase the second home for $1 million

Three years ago, you could have sold your first home to purchase a second home but instead, kept your first home and took out a greater mortgage to purchase the second home for $1 million

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Three years ago, you could have sold your first home to purchase a second home but instead, kept your first home and took out a greater mortgage to purchase the second home for $1 million. Today, you are desperate for cash and face the decision to sell that second home for the current market value, roughly $1.5 million. The $1 million purchase price of the second home is considered as: sunk cost, opportunity cost, irrelevant benefit or

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Answer: sunk cost

 

Since I am desperate to sell, the earlier purchase price becomes irrelevant here. I would go for selling at any price prevailing in the market. This happens here, since it is sold at $1.5 million. Although the selling price ($1.5 million) recovered the purchase price ($1 million), the earlier decision does not change. Therefore, it becomes a sunk cost.

 

Other options are not correct:

Opportunity cost: since the alternative of purchasing is already chosen, there is no opportunity cost.

Irrelevant benefit: selling property because of the need of cash doesn’t create any benefits.

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