Agreed. I would treat the sister's contribution as a loan to the parents, so pay that off first, and then split the remainder 50/50. If the parents had intended for the sister's contribution to alter the "ownership" balance, they could have specified that in the will, by saying something like that the house should be split 45/55 or 40/60. But they left the house to them equally, and after paying back the sister (and treating her contribution with generosity in terms of recognizing that $10k would be worth $20k now) they still own it 50/50.....
That said, don't be surprised if the sister has different assumptions. As you say, there are lots of ways to think about it, and arguments for a variety of calculations. We all tend to gravitate to the versions that benefit us, so she may be leaning a different way. Don't see this as "greedy" but instead as reasonably human, and stay willing to talk it through, even when you don't instantly agree. Inheritance issues so often damage relationships - even good ones. So you're smart to be thoughtful and open about it to try to avoid people getting dug in and hurting each other.