Dealer Monthly Cost Mileage Allowance Cost per added mile
Forno Saab $299 60,000 $0.17
Midtown Motors $310 75,000 $0.21
Hopkins Automotive $325 90,000 $0.15
Amy has decided to choose the lease option that will minimize her total 60-month cost; the difficulty is that Amy is not sure how many miles she will drive over the next five years. For purposes of this decision, she believes it is reasonable to assume that she will drive 12,000 miles per year, 15,000 miles per year, or 18,000 miles per year. With this assumption, Amy has estimated her total costs for the three lease options. For every mile driven above the mileage allowance, Amy will have to pay the additional cost per mile. REMEMBER THE VALUES YOU HAVE HERE ARE COSTS!!
a. What is the decision and what is the chance event?
b. Construct the 5-year payoff table for Amy’s problem.
c. If Amy has no idea which of the three mileage assumptions is most appropriate, what is the recommended decision (leasing option) using the optimistic approach? Using the conservative approach?
d. Suppose that the probabilities that Amy drives 12,000, 15,000, and 18,000 miles per year are .4, .5, and .1 respectively. Use the EMV approach to determine which decision will minimize the cost of the data processing operation. What is the expected annual cost?
e. Find the recommended decision using the Regret approach.
f. What is the expected value of perfect information?
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