Six months ago, Kelly O’Connor purchased a fire-engine red, used LeBaron convertible for $10,000. Kelly was looking forward to the feel of the sun on her shoulders and the wind whipping through her hair as she zipped along the highways of life. Unfortunately, the wind turned her hair into straw, and she didn’t do much zipping along since the car spent so much of its time in the shop. So far, she has spent $1,200 on repairs, and she’s afraid there is no end in sight. In fact, Kelly anticipates the following costs of restoration:
Rebuilt engine .......$ 700
New paint job ..........800
Tires .............360
New interior .........500
Miscellaneous maintenance ...340
Total ..........$2,700
On a visit to a used car dealer, Kelly found a four-year-old Toyota RAV4 in excellent condition for $10,000—Kelly thinks she might really be more the sport-utility type anyway. Kelly checked the blue book values and found that she can sell the LeBaron for only $3,600. If she buys the RAV4, she will pay cash but would need to sell the LeBaron.
Required:
1. In trying to decide whether to restore the LeBaron or buy the RAV4, Kelly is distressed because she has already spent $11,200 on the LeBaron. The investment seems too much to give up. How would you react to her concern?
2. List all costs that are relevant to Kelly’s decision. What advice would you give her?