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

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BlackTom AI · Accepted Answer

Question restatement: Savion has already spent 4,000 on restoring a car and is considering two paths: complete the remaining 2,400 of work to potentially sell for 5,800, or sell the car now for 3,800. The option provided as the answer is: d. Sell the car now for 3,800.

First, identify sunk costs: the 4,000 already spent is a sunk cost and should not affect the future decision. The key is to compare future cash flows.

Option: Complete the remaining 2,400 of work and sell for 5,800. The incremental cash flow from completing the work would be: sale price 5,800 minus additional cost 2,400 equals 3,400. This is the additional amount Savion would realize by finishing the restoration, ignoring the sunk 4,000 already spent.

Option: Sell now for 3,800. This provides an immediate cash inflow of 3,800 without incurring any more costs.

Comparison of options from a purely incremental perspective: Completing the work yields 3,400 in incremental profit, whereas selling now yields 3,800. Since 3,800 > 3,400, the financially better choice is to sell now rather than incur the extra 2,400 to complete the restoration.

Why the other reasoning is not appropriate: If someone mistakenly adds the sunk 4,000 to the potential incremental profit, they would be double-counting past expenditures, which is incorrect for decision-making. The correct approach focuses on future cash flows only.

Conclusion of the analysis: Given the numbers, the best move is to sell now for 3,800, because it provides a higher net present value of future cash flows compared to completing the remaining work and selling for 5,800. The option explicitly stated as the answer aligns with this conclusion.

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