Problem: Don Baxter's five year old Camaro requires repairs estimated at $5400 to make it roadworthy again. His friend Mike Blue suggested that he buy a 5 year old Chevette instead for $5400 cash. Mike estimated the following costs for the two cars:
| Costs |
|
|
Camaro |
|
Chevette |
| Acquisition Cost |
|
$24,000 |
|
$5,400 |
| Repairs |
|
|
$5,400 |
|
$0 |
| Annual operating costs: |
|
|
|
| Gas, maintenance, insurance |
$2,900 |
|
$1,800 |
Q1. What costs are relevant and what costs are not relevant for this decision? Why?
Q2. What should Don do? Explain.
Q3. What quantitative and qualitative factors are relevant for his decision? Why?