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Expected Values of 3-Year Hybrid Car Lease

Beverly Mills has decided to lease a hybrid car to save on gasoline expenses and to do her part to help keep the environment clean. The car she selected is available from only one dealer in the local area, but that dealer has several leasing options to accommodate a variety of driving patterns. All the leases are for 3 years and require no money at the time of signing the lease. The first option has a monthly cost of $330, a total mileage allowance of 36,000 miles (an average of 12,000 miles per year), and a cost of $0.35 per mile for any miles over 36,000. Beverly has estimated that, during the 3 years of the lease, there is a 40% chance she will drive an average of 12,000 miles per year, a 30% chance she will drive an average of 15,000 miles per year, and a 30% chance she will drive 18,000 miles per year. In evaluating these lease options, Beverly would like to keep her costs as low as possible.
(a) Develop a payoff (cost) table for this situation
(b) What decision would Beverly make if she were optimistic?
(c) What decision would Beverly make is she were pessimistic?
(d) What decision would Beverly make if she wanted to minimize her expected cost (monetary value)?

Solution Preview

(a) The following cost table shows the total amount Beverly will have to pay under each option assuming she drives a certain number of miles per year.

miles per year driven
12,000 15,000 18,000
option
1 $11,880 $15,030 ...

Solution Summary

We compute the expected costs of three 3-year hybrid car lease plans.

$2.19