What is the companys expected value of each item sold?

Question

A company estimates that 0.9% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $450.

they offer a 2 year extended warranty for $58, what is the company s expected value of each warranty sold?

Answer 1

expected value = (income of $58)(probability it doesn't fail) + (58-450)(probability it fails)

 

= 58((1-.009) + (-392)(.009)

 

 = 57.478 - 3.528

 

= 53.95