Question 6 - 8

A construction company has obtained a contnct for a highway project and will need to lezse an additional rosd grader foc a month tn fill nut its equipment flest. The company is trying to decide becween two different lease options for the grader: 1) lease an vlder grader far $7,500, or 2 l lease a newer grader for $10,000. The neaer grader is still under waranty, so the lease cost covers all repair expenses. Ifowever, the company would be responsible for any repair expenses if it leases the vlder grader. Scenario A: Tae cuostruetion company's maintenance Joreman believes lbure is a 25% chance that there will be no need lor repairs wilt the elder grader, but also thinks there is a 45% chanee that minor repairs (\$2,1000) conld be needed, and a 300 s chanee that major repairs (s3,10o0) might be repuired. 1. What is the expecsed cost (lease mlwe rapairs) of the nlder grader? Hue dad you detive lais value? 2. What is the expected cost (lease mlne repairs) of the newer grader? Hore dad you decive tbis value? 3. Using an Edw analysis, what is the beat lease option? (Older yrader ur Newer grader) Why! 4. Suppose the counpany could hire an experieceed mechane to inapotl the eld grader to delettine (belore the coubany wakes ils linal decisiea) whelbes no repsirs, minor repairs, ot mojhr repairs would be required. If the mechanic is always conect in her assessments, what is the most the oompany should pay the mechonio for the ingpection (hased on the FVPT)? Hn' did you derive this value? 5. Suppose the company decides nel to hire the exporienced mecasnic, and is unwilling to pay more than $10,000 fer the grader under any circumaslaees. Weuld bais change lhe decision about which grader to lease" (Yesino) Whyiwhy nor? Scenario B: Sappose the repairs for the old groder had the same probahilities as above lat were $4,000 for major repairs, $3,000 for minar repairs, and $0 for no repairs. 6. Wuuld this cange your dectision aboul the best lease option basel on an EMY analysis? (Yesine) Whysk'by Not? 7. Whar is the maximum that you wuald nay the experienced mechanic for her perfect assessment (hased on the FVPT Hna dia you derive this value? 8. Suppose the couripany decides nel to bite the expericuced inctanic, and is unwilling to pay more than $11,000 for the grader under any ciream srances. Woald this change the decision alout which gmder to lense? (Yesino) Whyiviny not