Question

Bill is restoring a car and has already spent $4,000 on the restoration. He expects to be able to sell the car for $6,200. Bill discovers that he needs to do an additional $2,400 of work to make the car worth $6,200 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 sell the car now for $3,800.
b. He should keep the car since it wouldn’t be rational to spend $6,400 restoring a car and then sell it for only $6,200. c. He should complete the additional work and sell the car for $6,200.
d. It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

Answer 1

d. It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

Step-by-step explanation:

*Expense of $4,000 is sunk cost which has been incurred and it does not have any impact on the decision.

Option 1: Sale without additional work

Sale price = $3,800

Option 2: Sale after additional work

Sale price = $6,200

Additional cost = $2,400

Net Sale receipt = 6200-2400 = $3,800

There is no difference of sales receipt in any option both have same value.