# Question: Mr Maloy has just bought a new 30 000 sport utility

Mr. Maloy has just bought a new $30,000 sport utility vehicle. As a reasonably safe driver, he believes that there is only about a 5% chance of being in an accident in the coming year. If he is involved in an accident, the damage to his new vehicle depends on the severity of the accident. The probability distribution for the range of possible accidents and the corresponding damage amounts (in dollars) are given in the file P06_67.xlsx.

Mr. Maloy is trying to decide whether he is willing to pay $170 each year for collision insurance with a $300 deductible. Note that with this type of insurance, he pays the first $300 in damages if he causes an accident and the insurance company pays the remainder.

a. Create a cost table that specifies the cost (in dollars) associated with each possible decision and type of accident.

b. Use PrecisionTree to identify the strategy that minimizes Mr. Maloy’s annual expected cost.

c. Perform a sensitivity analysis on the optimal decision with respect to the probability of an accident, the premium, and the deductible amount, and summarize your findings. (You can choose the ranges to test.) In response to which of these three inputs is the expected cost most sensitive?

Mr. Maloy is trying to decide whether he is willing to pay $170 each year for collision insurance with a $300 deductible. Note that with this type of insurance, he pays the first $300 in damages if he causes an accident and the insurance company pays the remainder.

a. Create a cost table that specifies the cost (in dollars) associated with each possible decision and type of accident.

b. Use PrecisionTree to identify the strategy that minimizes Mr. Maloy’s annual expected cost.

c. Perform a sensitivity analysis on the optimal decision with respect to the probability of an accident, the premium, and the deductible amount, and summarize your findings. (You can choose the ranges to test.) In response to which of these three inputs is the expected cost most sensitive?

**View Solution:**## Answer to relevant Questions

The purchasing agent for a PC manufacturer is currently negotiating a purchase agreement for a particular electronic component with a given supplier. This component is produced in lots of 1000, and the cost of purchasing a ...A manufacturer must decide whether to extend credit to a retailer who would like to open an account with the firm. Past experience with new accounts indicates that 45% are high-risk customers, 35% are moderate risk ...Suppose an investor has the opportunity to buy the following contract, a stock call option, on March 1. The contract allows him to buy 100 shares of ABC stock at the end of March, April, or May at a guaranteed price of $50 ...This problem illustrates an interesting variation of simple random sampling.a. Open a blank spreadsheet and use the RAND() function to create a column of 1000 random numbers. Don’t freeze them. This is actually a simple ...The file P07_14.xlsx contains a very small population of only five members. For each member, the height of the person is listed. The purpose of this problem is to let you see exactly what a sampling distribution is. Find the ...Post your question