Stan Moneymaker presently owns a 10-year-old automobile with low mileage (78,000

Question

Stan Moneymaker presently owns a 10-year-old automobile with low mileage (78,000 miles). The NADA "blue book" value of the car is $2 300. Unfortunately, the car's transmission just failed, and Stan decided to spend $1 700 to have it repaired. Now, six months later, Stan has decided to sell the car, and he reasons that his asking price should be $2 300plus $1700equals $4 000. Comment on the wisdom of Stan's logic. If he receives an offer for $1 800 , should he accept it? Is Stan's price fair? Choose the correct answer below.

A. Stan's price is probably too low because the new transmission adds more than its full value to the N.A.D.A. estimate of the car's worth.

B. Stan's price is adequate because the new transmission adds its full value to the N.A.D.A. estimate of the car's worth.

C. Stan's price is probably too high because the new transmission adds little value to the N.A.D.A. estimate of the car's worth.

Should Stan accept the $1 800 offer? yes or no

Explanation / Answer

A sunk cost is one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. Thus, a sunk cost is common to all alternatives, is not part of the future (prospective) cash flows, and can be disregarded in an engineering economic analysis.

This is an example of a sunk cost. The NADA book value of a car is a depreciative cost and decreases as time passes.

The repairing cost of car is a sunk cost which cant be included in total value of the car.

C option is right

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