Damage None Minor Major Decision Alternative S1 S2 S3 Purchase Insurance, d, Do Not Purchase Insurance, d, Probabilities 10,000 10,000 10,000 100,000 200,000 0.96 0.03 0.01
Damage None Minor Major Decision Alternative S1 S2 S3 Purchase Insurance, d, Do Not Purchase Insurance, d, Probabilities 10,000 10,000 10,000 100,000 200,000 0.96 0.03 0.01
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Alexander Industries is considering purchasing an insurance policy for its new office
building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries
doesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000
is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including
the state-of-nature probabilities, are as follows:
a. Using the expected value approach, what decision do you recommend?
Transcribed Image Text:Damage
None
Minor
Major
Decision Alternative
S1
S2
S3
Purchase Insurance, d,
Do Not Purchase Insurance, d,
Probabilities
10,000
10,000
10,000
100,000
200,000
0.96
0.03
0.01
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