Mark is planning to buy a high-end laptap. The market price of the laptap is $2000. While making the purchase, along with the regular replacement warranty for a year, he is also offered an extended warranty for two more years at a price of $300. The probability of the laptap malfunctioning each year is 20%. It is also expected that a similar laptap will cost $1500 after the end of the first year, and $1000 after the end of the second year. The current market rate of interest is 10%. (a) What is the present value of having the extended warranty during the third year of ownership? (b) What is the net present value of buying the warranty?

Mark is planning to buy a high-end laptap. The market price of the laptap is $2000. While making the purchase, along with the regular replacement warranty for a year, he is also offered an extended warranty for two more years at a price of $300. The probability of the laptap malfunctioning each year is 20%. It is also expected that a similar laptap will cost $1500 after the end of the first year, and $1000 after the end of the second year. The current market rate of interest is 10%. (a) What is the present value of having the extended warranty during the third year of ownership? (b) What is the net present value of buying the warranty?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

Problem 3P: Del Hawley, owner of Hawleys Hardware, is negotiating with First City Bank for a 1-year loan of...

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