Peace of Mind, Inc. (PMI) sells extended warranties for durable consumer goods such as washing machines and
Question:
Peace of Mind, Inc. (PMI) sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the customer, but later PMI must cover any repair costs that arise. An analyst working for PMI is considering a warranty for a new line of big-screen TVs. A consumer who purchases the 22-year warranty will pay PMI $200. On average, the repair costs that PMI must cover will average $106 for each for the warranty's 2 years. If PMI has a cost of capital of 7%, should it offer this warranty for sale?
The internal rate of return (IRR) for this project is ________%. (Round to two decimal places.)
The NPV of this project is $____. (Round to two decimal places.)
If PMI has a cost of capital of 7%, should it offer this warranty for sale? (Select the best answer below.)
A. With a cost of capital of 7% and an IRR of −2.24%, and an NPV of $26.39, PMI should reject this project.
B. With a cost of capital of −2.24% and an IRR of 7%, PMI should reject this project.
C. With a cost of capital of −2.24% and an IRR of 7%, PMI should accept this project.
D. With a cost of capital of 7% and an IRR of −2.24% and a NPV of $26.39, PMI should accept this project.
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba