Expected Value Question

Question

A company estimates that 0.7% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $350.

If they offer a 2 year extended warranty for $55, what is the company's expected value of each warranty sold?

Answer 1

outcome net probability

fail 55 - 360 = -295 0.007

no fail 55 0.993

expected = -295 * 0.007 + 55 * 0.993 = 52.55