Question

Dean Kuroff started a business of rehabbing old homes. He recently purchased a circa-1800 Victorian mansion and converted it into a three-family residence. Yesterday, one of his tenants complained that the refrigerator was not working properly. Dean’s cash flow is not extensive, so he was not excited about purchasing a new refrigerator. He is considering two other options: purchase a used refrigerator or repair the current unit. He can purchase a new one for $600, and it will easily last three years. If he repairs the current one, he estimates a repair cost of $150, but he also believes that there is only a 25% chance that it will last a full three years and he will end up purchasing a new one anyway. If he buys a used refrigerator for $200, he estimates that there is a 0.4 probability that it will last at least three years. If it breaks down, he will still have the option of repairing it for $150 or buying a new one. Develop a decision tree for this situation and determine Dean’s optimal strategy.

Answer 1

Answer:

The decision tree is a explained as follows

Step-by-step explanation:

Currently two options are available

1. Purchase a new refrigerator for $600.
2. Repair this refrigerator for $150,

• There is only 25% chance that the refrigerator will work for the next three years. $37.5 ($150 * 0.25)
• There is 75% chance that the refrigerator will need to be purchased a new refrigerator for $600. $450 ($600 * 75%)

   3. If he buys a used refrigerator for $200 there is 40% chance that it will work for next three years. $80 ($200 * 40%)

• But there is 60% chance that the refrigerator will not work and he will

              a. Repair the refrigerator for $150. $90 ($150 * 60%)

              b. Buy a new refrigerator for $600. $360 ($600 * 60%)