Question

An LG Dishwasher, which costs $800, has a 20% chance of needing to be replaced in the first 2 years of purchase. A two-year extended warranty costs $112.10 on a dishwasher. What is the expected value of the extended warranty assuming it is replaced in the first 2 years?

Answer 1

Answer:

The expected value of the extended warranty assuming it is replaced in the first 2 years is $687.90.

Explanation:

since the dishwasher has a 20% chance of needing to be replaced in the first 2 years, then:

the value of warranty = 20%×$800 - $112.10

                                   = $160 - $112.10

                                   = $47.10

when it is assumed that replacement is done in first two years, then the value of warranty increases to $800 - $112.10 = $687.90

Therefore, the expected value of the extended warranty assuming it is replaced in the first 2 years is $687.90.

Answer 2

The expected value of the extended warranty is $687.90 assuming it is replaced in the first 2 years.

Here, we are assuming that the dishwasher is replaced in the first 2 years in order to calculate the expected value of the extended warranty.

Because there is 20% chance of replacement:

Value of warranty = 20%*$800 - $112.10

Value of warranty = $160 - $112.10

Value of warranty = $47.10

Now, because it is assumed that replacement will be done in first 2 years, then,

Value of warranty will increase to $687.90 ($800 - $112.10).

Therefore, the expected value of the extended warranty is $687.90 assuming it is replaced in the first 2 years.

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