Question

Dean Kuroff started a business of rehabbing old homes. He recently purchased acirca-1800 Victorian mansion and converted it into a three-family residence. Recently, one of his tenants complained that the refrigerator was not working properly. Dean's cash flow was not extensive so he was not excited about purchasinga new refrigerator. He is considering two other options purchase a used refrigerator or repair the current unit. He can purchase a new one for $400, and it willeasily last 3 years. If he repairs the current one, he estimates a repair cost of $150,but he also believes that there is only a 30% chance that it will last a full 3 yearsand he will end up purchasing a new one anyway. If he buys a used refrigeratorfor $200, he estimates that there is a 0.6 probability that it will last at least 3 years.If it breaks down, he will still have the option of repairing it for $150 or buying anew one. Develop a decision tree for this situation and determine Dean's optimalstrategy

Answer 1

Dean Kuroff is considering two other options: purchase a used refrigerator or repair the current unit. He can purchase a new one for $400, and it will easily last three years. If he repairs the current one, he estimates a repair cost of S150, but he also believes there is only a 30% chance that it will last a full three years and he will end up purchasing a new one anyway. If he buys a used refrigerator for $200, he estimates that there is a .06 probability that it will last at least three years. If it breaks down, he will still have the option of repairing it for S150 or buying a new one. A decision tree for this situation is shown below

B C F G Purchase New Refrigerator (400.00) (400.00)(400.00) 0.3 Last full three years (150.00) Repair Old Refrigerator (150.00) (150.00)(430.00) 0.7 2(360.00) Purchase New Refrigerator (550.00) (400.00)(550.00) Last full three years (200.00) Purchase Old Refrigerator (200.00) (200.00)(360.00) 0.4 Purchase New Refrigerator (600.00) 5(400.00) s (60.00