The owner of a small business decided to lease a car to control transportation costs. One local 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 following table summarizes each of the options given:
3 Year lease Monthly cost ($) Mileage allowance Cost per excess Mile ($)
Option 1 330 36,000 0.35
Option 2 380 45,000 0.25
Option 3 430 54,000 0.15
The small business owner estimates that during the 3 years of the lease, there is a 40% chance of driving an average of 12,000 miles per year, a 30% chance of driving an average of 15,000 miles per year, and another 30% of driving an average of 18,000 miles per year. In order to make a rational decision:
a Develop an appropriate payoff table.
b. What is the decision if the owner is optimistic about the local market?
c. What is the decision if the owner is pessimistic about the local market?
d. What is the decision if the owner wanted to minimize expected costs?
e. What is the expected value of perfect information?
Subjet: Quantitative methods