Question

A retailer offers an extended warranty on a new microwave oven.

The cost of the warranty is $16.
The warranty stipulates that the retailer will replace the microwave oven if any failure occurs during the
warranty period.
They estimate that the probability of product failure during the warranty period is 7.1%, and that the cost of
replacing the microwave oven is $209.
Find the expected value, for the company, of a warranty.
Round your answer to two decimal places

Answer 1

The expected value for the company of a warranty is -$1.65.

Step-by-step explanation:

The expected value of a warranty can be calculated by multiplying the probability of product failure during the warranty period by the cost of replacing the microwave oven and subtracting the cost of the warranty.

Expected value = (Probability of failure) * (Cost of replacement) - (Cost of warranty)

Expected value = (0.071) * (209) - 16

Expected value = $14.349 - $16 = -$1.65

Therefore, the expected value for the company of a warranty is -$1.65, rounded to two decimal places.