The Average Time Before Breakdown of a Machine Is Normally

question 25

Multiple Choice

The average time before breakdown of a machine is normally distributed and has a mean of 18 weeks and a standard deviation of three weeks. If breakdown cost averages $2,000 and preventive maintenance costs $1,400, what is the optimal preventive maintenance interval?

• A)16.4 weeks
• B)14.6 weeks
• C)16.9 weeks
• D)19.6 weeks
• E)21.3 weeks

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Definitions:

Discount Rates

The rate of interest applied to calculate the current value of future cash flows.

Market Proxy

A singular asset or portfolio that represents the characteristics of an entire market segment or the market as a whole.

CAPM

The Capital Asset Pricing Model, which describes the relationship between systematic risk and expected return for assets, particularly stocks, suggesting that investors need to be compensated in two ways: time value of money and risk.

Fama and French

Scholars who developed a three-factor model for explaining the risk and return of stocks and other investments.