Question

Stephen is restoring a car and has already spent $4,000 on the restoration. he expects to be able to sell the car for $5,800. stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. he could also sell the car now, without completing the additional work, for $3,800. what should he do?

a. he should keep the car since it wouldn't be rational to spend $6,400 restoring a car and then sell it for only $5,800.

Answer 1

In the given case, Stephan has already spent $4,000 on the restoration of a car. Now there are two options with him:

In the first option, he can sell the car for $5,800 after spending an additional $2,400. So the total amount spent on car is (4000+2400) = $6,400.

Hence the net loss on sale for car shall be (2400+4000)-5800 = $600

In the Second option, he can sell the car for 3,800 without incurring any other cost. Hence the net loss on sale for car shall be 4000-3800 = $200

Hence the loss in lower in the case of the second option. Hence he should keep the car since it wouldn't be rational to spend $6,400 restoring a car and then sell it for only $5,800.