Dean Kuroff started a business of rehabbing old homes. He recently purchased a circa 1800 Victorian mansion
Question:
Dean Kuroff started a business of rehabbing old homes. He recently purchased a circa 1800 Victorian mansion and converted it into a three family residence. Recently, one of his tenants complained that the refrigerator was not working properly. Dean’s cash flow was not extensive, so he was not excited about purchasing a new refrigerator. He is considering two other options: purchase a used refrigerator or repair the current unit. He can purchase a new one for $ 400, and it will easily last 3 years. If he repairs the current one, he estimates a repair cost of $ 150, but he also believes that there is only a 30% chance that it will last a full 3 years and he will end up purchasing a new one anyway. If he buys a used refrigerator for $ 200, he estimates that there is a 0.6 probability that it will last at least 3 years. If it breaks down, he will still have the option of repairing it for $ 150 or buying a new one. Develop a decision tree for this situation and determine Dean’s optimal strategy.
Step by Step Answer:
Business Analytics Methods Models and Decisions
ISBN: 978-0321997821
2nd edition
Authors: James R. Evans