Scenario 5.5: Engineers at Jalopy Automotive Have Discovered a Safety Flaw in Flaw

question 39

Multiple Choice

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. The expected cost to the firm if it does not fix the car is:

• A) $0.
• B) $24 million.
• C) $7.9 million.
• D) $2 million.
• E) $3.6 million.

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Definitions:

Supply Uncertainty

The risk of unpredictability in obtaining required materials or products from suppliers, which can affect production schedules, costs, and market responsiveness.

Exchange Rates

The value of one currency expressed in terms of another currency, which plays a critical role in international trade and finance.

Simulation Methods

Techniques used to imitate the operation of real-world processes or systems over time, often for the purpose of analysis or training.

Discounted Cash Flow (DCF) Analysis

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money.