In: Finance
After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete maintenance (or service) policy at a cost of $500, which would cover all maintenance costs; (2) a partial maintenance policy at a cost of $300, which would cover some of the costs of maintenance; or (3) no maintenance policy. The consequences, costs and probabilities are given in the following table:
MAINTENANCE |
NOT REQUIRED |
|
No Service Agreement |
$3,000 |
$0 |
Partial Service Agreement |
$1,500 |
$300 |
Complete Service Agreement |
$500 |
$500 |
Probabilities |
0.2 |
0.8 |
Using EMV, what do you recommend?
Buy the complete service agreement since it has lowest expected cost
MAINTENANCE | NOT REQUIRED | EMV | |
REQUIRED | |||
No Service Agreement | $3,000 | $0 | $600 |
Partial Service Agreement | $1,500 | $300 | $540 |
Complete Service Agreement | $500 | $500 | $500 |
Probabilities | 0.2 | 0.8 |