Dean Kuroff started a business of rehabbing old homes. He recently purchased a circa-1800 Victorian mansion and converted it int
o 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.
