Mr. Maloy has just bought a new $40,000 sport utility vehicle. Given his health conditions, he believes that there is about a 15% chance of being in an accident (that he caused) in the forthcoming year. If he is involved in an accident (he causes), the damage to his new vehicle depends on the severity of the accident (see table). Mr. Maloy is trying to decide whether he is willing to pay $600 each year to buy collision insurance with a $1500 deductible (i.e. He pays the first $1,500 in damages if he causes an accident and the insurance company pays the remainder.) Should he buy the insurance? (Note that if the accident is caused by another person that other person is responsible to pay for the damages to Mr. Maloy’s vehicle.) Therefore there are only two cases – 1. An accident he causes 2. No accident or an accident caused by someone else.
Probability of an accident (he causes) 15%
Cost of insurance $600
Deductible $1,500
Type of Accident Cost Cond. Probability
Total $40,000 5%
Very Bad $10,000 15%
Unpleasant $3,000 25%
Little Damage $1,000 55%
Please give me the excel worksheet answer with formulas