Question

A company estimates that 0.9% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $450. If they offer a 2 year extended warranty for $27, what is the company's expected value of each warranty sold? $

Answer 1

The expected value of each extended warranty sold by the company is $19.05. This is calculated by taking the 0.9% failure rate after the original warranty period (0.009) multiplied by the replacement cost of $450, which gives an expected cost of $4.05. Then, subtract the cost of the extended warranty ($27) to get an expected value of $19.05 per warranty sold.