Expected Value Question

Question

A company estimates that 0.8% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $100.

If they offer a 2 year extended warranty for $12, what is the company's expected value of each warranty sold?

Answer 1

Outcome net for company probability

fail 12 - 100 = -88 0.008

no fail 12 0.992

expected value = -88 * 0.008 + 12 * 0.992 = 11.2