LAX runway pavement is replaced every two years at a cost of $1million. The most recent...
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LAX runway pavement is replaced every two years at a cost of $1million. The most recent replacement happened exactly a year ago at which time Simillion was paid. A startup company, HIT THE ROAD, offers you the following deal: Switch to a new material TODAY that may last longer. Company claims that it will last twice as long, however, data indicates that there is a 40% chance that it will still last only two years. You will know it for sure, the first time you use the new material. That is, if the new material lasts 4 years in its first use, it will never fail to last 4 years in the future, if it only lasts two years, it will continue to last two years. In addition, assume that if you make the switch today, you can never go back to the original material. a) What is the maximum amount you would pay for this new material if the market rate is 10%? b) In order to sweeten the deal, HIT THE ROAD offers to provide the pavement for free for its first use only. Now, what is the maximum price you would pay? LAX runway pavement is replaced every two years at a cost of $1million. The most recent replacement happened exactly a year ago at which time Simillion was paid. A startup company, HIT THE ROAD, offers you the following deal: Switch to a new material TODAY that may last longer. Company claims that it will last twice as long, however, data indicates that there is a 40% chance that it will still last only two years. You will know it for sure, the first time you use the new material. That is, if the new material lasts 4 years in its first use, it will never fail to last 4 years in the future, if it only lasts two years, it will continue to last two years. In addition, assume that if you make the switch today, you can never go back to the original material. a) What is the maximum amount you would pay for this new material if the market rate is 10%? b) In order to sweeten the deal, HIT THE ROAD offers to provide the pavement for free for its first use only. Now, what is the maximum price you would pay?
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Related Book For
Auditing A Practical Approach with Data Analytics
ISBN: 978-1119401742
1st edition
Authors: Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton
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