A construction company has obtained a contract for highway project and will need to lease additional road grader for month to fill out its equipment fleet. The company is trying to decide between two different lease options for grader: 1) lease an older grader for $8,500, or 2) lease new grader for $10,000.
The newer grader is still under warranty, so the lease cost covers all repair expenses. However, the company would be responsible for any repair expenses if it leases the older grader. The construction company's maintenance foreman believes there is a 30% chance that there will be no need for repairs with the older grader, but also thinks there is a 45% chance that some repairs ($2,000) could be needed, and a 25% chance that significant repairs ($5,000) might be required.
1. What is the expected cost (lease plus repairs) of the older grader?
2. What is the expected cost (lease plus repairs) of the newer grader?
3. What is the best lease option?
4. Suppose the company could hire an experienced mechanic to inspect the older grader to determine the repair cost before the company makes its final decision. If the mechanic is always correct in her assessment, what is the most the company woud pay for the inspection? (Hint: EVPI)