As a muscle car aficionado, a friend of yours likes to restore cars of the 60s and 70s and sell them for a profit. He started his latest project (a 1965 Shelby GT350) four months ago and has a total of $126,000 invested so far. Another opportunity has come up (a 1969 Dodge Charger) that he is thinking of buying because he believes he could sell it for a profit of $60,000 after it is completely restored. To do so, however, he would have to sell the unfinished Shelby first. He thought that the completely restored Shelby would be worth $195,000, resulting in a tidy profit of $22,000, but in its half-restored condition, the most he could get now is $115,000. In discussing the situation with you, he stated that if he could sell the Shelby now and buy the Charger at a reduced price, he would make up for the money he will lose in selling the Shelby at a lower-than-desired price.

(a) What is wrong with this thinking?

(b) What is his sunk cost in the Shelby?