Expected Value Questions

Question

A company estimates that 0.6% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $450.

If they offer a 2 year extended warranty for $61, what is the company's expected value of each warranty sold?

Answer 1

status profit probability

failure 61-450 = -389 0.006

no failure 61 0.994

expected profit = -389 * 0.006 + 61 * 0.994 = 58.30