Scenario: An air-conditioner manufacturing company offers a warranty of 3 years on a new air conditioner at a cost of $150. The air conditioner costs $1,500 and has a 15/100 or 15 percent probability of a breakdown each year. A new air conditioner will cost $1,000, $650, and $350, respectively, in the following 3 years. The interest rate on your credit card is 12 percent.
-Refer to the scenario above.The net present value of buying the warranty is ________.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by considering the probability of breakdown, the cost of replacement, and the discount rate. The NPV of buying the warranty is $99.02 after accounting for these factors.

Scenario: an Air-Conditioner Manufacturing Company Offers a Warranty of 3