Jerry Is Interested in Purchasing a Washing Machine

Essay

Jerry is interested in purchasing a washing machine. The price of the machine is $500, and it comes with a 1-year warranty. The probability that the machine will break down is 20 percent every year. If the machine breaks down in the second year and Jerry holds a warranty, he receives a new washing machine worth $400 that year. If the machine breaks down after 3 years and he holds a warranty, he receives a new machine that is worth $300 after the third year. The price of a warranty for 3 years is $150. The market interest rate is 5 percent. Is buying the warranty a good investment for Jerry? Explain your answer. Show all the necessary calculations.