Question

Susan Crossing purchased a used Ford Focus for $12,000. Since purchasing the car, she has spent $5,450 on parts and labor for a new stereo system, new paint job, new tires and a new muffler. Unfortunately, the car needs a few more major repairs. The brake rotors and pads must be replaced and the radiator has sprung a leak. The repairs are estimated to cost $2,500. Susan has looked around at other cars and has found a used Honda Civic for $10,500 that is in very good condition and is approximately the same age as the Ford Focus for $10,500. Susan can sell her Ford Focus for $8,500. What should Susan do?

Answer 1

solution:

Given

purchased a used Ford Focus for $12,000

spent $5,450

The repairs are estimated to cost $2,500.

Honda Civic for $10,500

Ford Focus for $10,500

Susan can sell her Ford Focus for $8,500

What should Susan do:

explanation:

What is already spent is a sunk cost and Susan should not bother about that. Whether the car is sold or not, the expenditure already incurred is a past matter.

If Susan is retaining the existing car her cash outflow will be = $ 2,500

If she buys the Civic, the net cash outflow =10500-8500 = $ 2,000

conclusion:

AS the outflow associated with buying the Civic is lower, Susan should buy the CIVIC, granting that Susan is equally happy with both the cars.

Qualitative factors would be the comfort factors associated with the cars.