Question

6. A company estimates that .6% of its products will fail after the original warranty period but within a 5-year warranty period, with a replacement of $450. If they offer a 5-year extended warranty for $60, what is the company’s expected value for each policy sold? (round to the penny)

Answer 1

Answer:

The answer is: $57.30

Explanation:

To determine the expected value of each warranty policy that was sold, we can use the following formula:

expected value = policy price - (probability of failure x cost of replacement)

expected value = $60 - (0.6% x $450)

expected value = $60 - $2.70 = $57.30