Six months ago, Lee Anna Carver purchased a fire-engine red, used LeBaron convertible for $10,000. Lee Anna 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, Lee Anna anticipates the following costs of restoration:
Rebuilt engine ......................... $1,250
New paint job ............................. 560
Tires ........................................ 460
New interior .............................. 500
Miscellaneous maintenance ............ 340
Total ................................... $3,110
On a visit to a used car dealer, Lee Anna found a five-year-old Honda CR-V in excellent condition for $9,100-Lee Anna thinks she might really be more the sport-utility type anyway. Lee Anna checked the Blue Book values and found that she can sell the LeBaron for only $3,600. If she buys the CR-V, 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 CR-V, Lee Anna 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 Lee Anna's decision. What advice would you give her?