3-29 Beverly Mills has decided to lease a hybrid car to save on gasoline expenses and to do her
part to help keep the environment clean. The car she selected is available from only one dealer
in the local area, but that dealer has several leasing options to accommodate a variety of driving
patterns. All the leases are for 3 years and require no money at the time of signing the lease.
The first option has a monthly cost of $330, a total mileage allowance of 36,000 miles (an
average of 12,000 miles per year), and a cost of $0.35 per mile for any miles over 36,000. The
following table summarizes each of the three lease options:
COST PER EXCESS MILE
Beverly has estimated that, during the 3 years of the lease, there is a 40% chance she will drive
an average of 12,000 miles per year, a 30% chance she will drive an average of 15,000 miles
per year, and a 30% chance that she will drive 18,000 miles per year. In evaluating these lease
options, Beverly would like to keep her costs as low as possible.
(a) Develop a payoff (cost) table for this situation.