Question

A company estimates that 0.7% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $150. If they offer a 2 year extended warranty for $12, what is the company's expected value of each warranty sold

Answer 1

$10.97

Step-by-step explanation:

Calculation for what is the company's expected value of each warranty sold

First step is to calculate the outcome

Outcome=$150-$12

Outcome=138

Second step is to calculate the outcome probability

Outcome probability=1-0.007

Outcome probability=0.993 and 0.007 respectively

Now let calculate the company's expected value of each warranty sold

Expected value of each warranty sold=$12*0.993+(-$138)*0.007

Expected value of each warranty sold=$10.97

Therefore Expected value of each warranty sold is $10.97