Problem 12-3 Amy Lloyd is interested in leasing a new Honda and has contacted th
ID: 3155074 • Letter: P
Question
Problem 12-3 Amy Lloyd is interested in leasing a new Honda and has contacted three automobile dealers for priding information. Each dealer offered Amy a dosed-end 36-month lease with no down payment due at the time of signing. Each lease indudes a monthly charge and a mileage allowance. Additional miles receive a surcharge on a per-mile basis. The monthly lease cost, the mileage allowance, and the cost for additional miles follow: Monthly Cost Mileage Allowance Cost per Additional Mile Dealer Hepburn Honda Midtown Motors Hopkins Automotive $299 $310 $325 36,000 45,000 54,000 $0.15 $0.20 $0.15 Amy decided to choose the lease option that will minimize her total 36-month cost. The difficulty is that Amy is not sure how many miles she will drive over the next three years For purposes of this decision, she believes it is reasonable to assume that she will drive 12,000 miles per year, 15,000 miles per year or 18,000 miles per year. With this assumption Amy estimated her total costs for the three lease options. For example, she figures that the Hepburn Honda lease will cost her 36($299) $0.15(36000 -36000) - $10,764 if she drives 12,000 miles per year, 36(8299) $0.15(45000-36000) 12,114 if she drives 15,000 miles per year, or 36($299)+ s0.15(54000 - 36000)-$13,464 f she drives 18,000 miles per year (a) What is the decision, and what is the chance event? Choose the correct answer below (1) The decision is to select the number of miles Amy will drive and the chance event is the three alternatives (Hepburn Honda, Midtown Motors, and Hopkins Automotive). (il) The decision is to select the monthly cost and the chance event is the three alternatives (Hepburn Honda, Midtown Motors, and Hopkins Automotive). (ili) The decision is to select the best lease option from three alternatives (Hepburn Honda, Midtown Motors, and Hopkins Automotive) and the chance event is the number of miles Amy will drive. (iv) The decision is to select the best lease option from three alternatives (Hepburn Honda, Midtown Motors, and Hopkins Automotive) and the chance event is the monthly cost that Amy will incur -select your answer.Explanation / Answer
a. The decision is to choose the best lease option; there are three alternatives.The chance event is the number of miles Amy will drive per year.There are three possible outcomes.
b.The payoff table for Amy's problem is shown below. To illustrate how the payoffs were computed, we show how to compute the total cost of the Forno Saab lease assuming Amy drives 15,000 miles per year.
Total Cost=(Total Monthly Charges) + (Total Additional Mileage Cost)
=36($299) + $0.15(45,000 - 36,000)
=$10,764 + $1350
=$12,114
c.
Optimistic Approach : Forno Saab($10,764)
Conservative Approach : Hopkins Automotive($11,160)
Opportunity Loss or Regret Table:
Minimax Regret Approach: Hopkins Automotive
d. EV(Forno saab) = 0.5($10,764)+0.4($12,114)+0.1($13,464) = $11,574
EV(Midtown Motors) = 0.5($11,160)+0.4($11,160)+0.1($12,960) = $11,340
EV(Hopkins Automotive) = 0.5($11,700)+0.4($11,700)+0.1($11,700) = $11,700
Best Decision : Midtown Motors
Annual Miles Driven Dealer 12,000 15,000 18,000 Forno Saab $10,764 $12,114 $13,464 Midtown Motors $11,160 $11,160 $12,960 Hopkins Automotive $11,700 $11,700 $11,700