Question

Your car needs to be repaired. You have already paid $800 to have the transmission fixed, but it still doesn’t work properly. You can sell your car “as is” for $5000. If your car were fixed, you could sell it for $5500. Your car can be fixed with a guarantee for $400. Should you repair your car? Why?

Answer 1

We have already paid the amount for fixing transmission.

It cannot be recovered even though transmission does not work properly.

So, amount paid to repair transmission is sunk cost.

Sunk cost is not considered while making a decision.

So, we would not consider $800 in consideration of whether sell car after further repairs or without further repairs.

If we repair our car for $400 (it is guaranteed repairs), we can sell it for $5,500

Without repair, we can sell it for $5,000.

This means that by incurring a cost of $400, we can get additional $500 on sale of car. This implies an additional earning of $100 through sale of car.

Since, selling the car after guranteed repair is more profitable preposition, we should repair our car and then sell it.