Question

SWO provides a ten-year warranty with all equipment sales. The warranty covers all defects and breakdowns that are not directly related to regular wear and tear. Based on the experience, SWO estimates the probability of an equipment making a warranty claim during the next 10 year of coverage is as follows: 

Year 1 2 3 4 5 6 7 8 9 101%2% 2% 5% 5% 10% 12% 15% 18% 20% 

The average retail value per claim is $100 currently and increases by 3% every year. The average cost of parts and service at SWO is about 60% of the retail value. The effective interest rate is 6%.

***Calculate the PV of warranty

Answer 1

Calculation Of PV of Warranty for SWO for each year for next 10 years
		in $
Year	Probablity of Warranty Claim (a)	Average Retail Value Per Warranty Claim (b)	Value of Warranty Claim for SWO (60% of b) = (c)	PV at rate of   6% for $1 (d)	PV of Warranty per claim {(c)*(d)} = (e)	PV of Warranty per claim for SWO {(a)*(e)}
1	1%	100	60.00	$            0.94	$            56.60	$                0.57
2	2%	103.00	61.80	$            0.89	$            55.00	$                1.10
3	2%	106.09	63.65	$            0.84	$            53.45	$                1.07
4	2%	109.27	65.56	$            0.79	$            51.93	$                1.04
5	5%	112.55	67.53	$            0.75	$            50.46	$                2.52
6	10%	115.93	69.56	$            0.70	$            49.03	$                4.90
7	12%	119.41	71.64	$            0.67	$            47.65	$                5.72
8	15%	122.99	73.79	$            0.63	$            46.30	$                6.94
9	18%	126.68	76.01	$            0.59	$            44.99	$                8.10
10	20%	130.48	78.29	$            0.56	$            43.71	$                8.74

here retail value of claim is shown after increasing 3% each year from the last year

For SWO Present Value of Warranty Claim is calculated considering the probablity of its occurence