Julie Levesque purchased a previously owned, two-year-old Camry for $8,900. Since purchasing the car, she has spent the following amounts on parts and labour:
New stereo system ............................... $1,200
Trick paint ......................................... 400
New wide racing tires ............................ 800
Total ................................................. $2,400
Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Camry needs a considerable amount of work to make it reliable transportation. Julie estimates that the needed repairs include the following:
Transmission overhaul .................... $2,000
Water pump ................................ 400
Master cylinder work ....................... 1,100
Total .......................................... $3,500
In a visit to a used car dealer, Julie has found a one-year-old Neon in mint condition for $9,400. Julie has advertised and found that she can sell the Camry for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Camry.
Required:
1. In trying to decide whether to restore the Camry or to buy the Neon, Julie is distressed because she already has spent $11,300 on the Camry. The investment seems too much to give up. How would you react to her concern?
2. Assuming that Julie would be equally happy with the Camry or the Neon, should she buy the Neon, or should she restore the Camry?