Keep or Buy, Sunk Costs

Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor:

New stereo system$1,200Trick paint400New wide racing tires800Total$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$2,000Water pump400Master cylinder work1,100Total$3,500

In a visit to a used car dealer, Heather has found a 2005 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:

1.Conceptual Connection: 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?