Question 1195532
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A company estimates that 0.5% of their products will fail after the original warranty period 
but within 2 years of the purchase, with a replacement cost of $200.
If they offer a 2 year extended warranty for $27, what is the company's expected value 
of each warranty sold?
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<pre>
Notice that 0.5% = 0.005.


The expected profit of selling each warranty is

    27 - 0.005*200  dollars = 27 - 1 = 26  dollars.


Here $27 is what the customer pays for the 2-years warranty,
and 0.005*200 = 1 dollar is the company's average expense per unit to cover the replacement.


The net  27 - 1 = 26 dollars is the expected company's profit of each warranty sold.


$26 is the price which the customer does agree to pay to the company for peace in mind.
</pre>

Solved and explained.


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To me, &nbsp;the presented input data seems to be strange, unfair and unrealistic.


Double check if &nbsp;0.5% &nbsp;is correct value in your post.

It is more likely that it is &nbsp;5%.