You are considering buying a car from a company which offers an insurance plan for a one-time cost today of $75. For this price, the company will cover any repair costs over $50 each year for the next 5 years. You estimate that the probability of the new car requiring a repair exceeding $50 is 0.01 during the first year, 0.025 during the second, 0.045 for the third, 0.07 for the fourth, and 0.10 for the fifth year. Assuming the occurrence of a repair in each year is statistically independent and your MARR is 10%, what annual amount of a repair (exceeding $50) each year for 5 years would make you indifferent to buying the insurance. In other words, at what annual repair amount would you break even on your insurance cost?
You are considering buying a car from a company which offers an insurance plan for a one-time cost today of $75. For this price, the company will cover any repair costs over $50 each year for the next 5 years. You estimate that the probability of the new car requiring a repair exceeding $50 is 0.01 during the first year, 0.025 during the second, 0.045 for the third, 0.07 for the fourth, and 0.10 for the fifth year. Assuming the occurrence of a repair in each year is statistically independent and your MARR is 10%, what annual amount of a repair (exceeding $50) each year for 5 years would make you indifferent to buying the insurance. In other words, at what annual repair amount would you break even on your insurance cost?
Chapter8: Sequences, Series,and Probability
Section8.7: Probability
Problem 11ECP: A manufacturer has determined that a machine averages one faulty unit for every 500 it produces....
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Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
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Transcribed Image Text:You are considering buying a car from a
company which offers an insurance plan
for a one-time cost today of $75. For this
price, the company will cover any repair
costs over $50 each year for the next 5
years. You estimate that the probability of
the new car requiring a repair exceeding
$50 is 0.01 during the first year, 0.025
during the second, 0.045 for the third,
0.07 for the fourth, and 0.10 for the fifth
year.
Assuming the occurrence of a repair in
each year is statistically independent and
your MARR is 10%, what annual amount
of a repair (exceeding $50) each year for
5 years would make you indifferent to
buying the insurance. In other words, at
what annual repair amount would you
break even on your insurance cost?
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