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30 August, 21:46

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?

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  1. 30 August, 22:14
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    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.
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