Question

A company estimates that 0.8% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $300.

If they offer a 2-year extended warranty for $47, what is the company's expected value of each warranty sold? Round your answer to the nearest cent.

Answer 1

Answer: The expected value of each warranty sold can be calculated as the sum of the product of the probability of a product failing after the original warranty period and the replacement cost, and the cost of the extended warranty:

Expected value = (0.8% of $300) + ($47)

Expected value = (0.008)($300) + ($47)

Expected value = $2.40 + $47

Expected value = $49.40

Therefore, the company's expected value of each warranty sold is $49.40.

Explanation: