As your teachers used to say, "Just answer the question!"

I tried to explain the concept of notional costing and how it helps with decision making here as follows:

... allow me to give a simple example:

Mr A and Mr B both have sons who attend the local university. Mr A's house is small, and Son A has noisy younger brothers and sisters, so Mr A (being a generous soul) pays £90 a week rent for Son A to live elsewhere (but Son A has to pay his share of the bills of £10 a week).

Mr B's house is big and Son B stays at home in a room which Mr B could sub-let for £100, but Mr B (also being a generous soul) allows his son to stay there for £10 a week, enough to cover his share of the bills.

Mr A has a cash cost of £90...

Mr B has no cash cost (quite clearly) but he has a notional cost of £90 (the rent he forgoes by undercharging his son rent or not chucking him out and sub-letting for £100 - which is clearly also an 'economic subsidy' to Son A) but Mr B also has the notional income, which he chooses in this example to spend on his son...

To finish off the analogy, imagine that Mr A bumps into a builder who can do a sound-insulated loft conversion for £15,000 which will add £20,000 to the value of Mr A's house and in which Son A would be happy to live. Mr A could save himself the actual cash cost of £90 and allow his son to stay living at home for £10 a week bills...

So the question is, if you were Mr A, would you rather have the loft conversion done for £15,000 (which would increase the value of the house) done or pay £14,000 in rent?

A Certain commenter is determined to "prove" that it is better to pay £14,000 in rent by introducing all sorts of increasingly unrealistic assumptions:

"In practice, the extension might only add £10,000 to the value of his house - in that case, are you going to add that loss to the cost?"

Yes of course. But as this loss is not realised until Mr A sells the house, we would also have to include the value of the extra room that he will be able to use or enjoy (once his son has moved out) until such a time; whether for storage, study, guest room (or indeed start charging his son full rent once he has qualified), whatever, which I have not included as the cost and the income net off to a small and uncertain amount either way*.

"Mr A's decision will depend on the interest rate he pays**, the increase in the value of his house that he gets by building the extension, and his view of what is likely to happen to house prices in the future. Which means that your case that Mr A should build the extension depends on his belief in ever rising house prices."

Nope. Mr A's decision depends on whether he'd rather shell out £14,000 in rent and get nothing in return, or shell out £15,000 and get considerably more than that in return in the future use of one extra room and an uncertain amount extra if and when he sells the house (which may indeed be as little as £10,000, but you don't get marks in an exam for completely re-writing the question and then answering that instead).

* We would, in practice, treat the £15,000 as a cost and include a) the additional resale value plus b) the future value-in-use as income. My original question assumed that a) + b) = "at least £15,000", so we can net off the cost and the income, and then exclude the net income figure from our calculations for uncertainty.

** The key to using notional costing as a decision-making tool is that you can ignore costs that are much the same either way: it is pointless including the interest cost on £15,000, because if Mr A chooses to pay the £14,000 rent he also has an interest cost, so all we are looking at is the net extra interest cost on the difference of £1,000, which is unlikely to be more than £50 a year anyway, so can be ignored. The commenter gets an extra mark deducted for including the interest cost on the option he doesn't like and ignoring the interest cost on the option he prefers.