KEEP OR BUY, SUNK COSTS Heather Alburty purchased a previously owned, two-year-old Grand Am for $8,900.

Since purchasing the car, she has spent the following amounts on parts and labor:

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 Grand Am needs a considerable amount of work to make it reliable transportation. Heather 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, Heather has found a one-year-old Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am.

Required:

. In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern?

. Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am?

Exercise