Solve Applications Involving Expected Values

question 7

Multiple Choice

Solve applications involving expected values.
-A small business just leased a new computer and color laser printer for three years.
The service contract for the computer offers unlimited repairs for a fee of $100 a year
Plus a $25 service charge for each repair needed. The company's research indicates that
During a given year 86% of these computers need no repairs, 9% need to be repaired
Once, 4% twice, 1% three times, and none required more than three repairs. The standard
Deviation of the company's annual expense with the service contract for the computer is

• A) $105.
• B) $10.25.
• C) $187.42.
• D) $13.69.
• E) $2.75.

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Definitions:

Real Options

Options with payoffs in real goods.

Operating Cash Flow

Measurement of the cash generated by a company's normal business operations.

Quantity Sold

The total number of units of a product or service that have been sold within a specific period.

NPV

Net Present Value; a calculation that compares the present value of cash inflows to the present value of cash outflows over a period of time.