1 N ittany Mortgage and Trust Nittany Mortgage and Trust [vaiTl is a small, local provider of residential and commercial loans. After establishing a solid reputation and customer base, MT is reconsidering the way it offers loans to new clients. Previous lending experience indicates that 10% of all new customers end up defaulting on their loans. If a customer defaults, MIT su'ers an expected loss of approximately $2,500. 0n the other hand, for the 00% of customers who do not default, NMT makes an expected prot of $300. The problem is that N'MT must decide whether or not to offer a new client a loan prior to knowing whether they will actually default. By not offering a loan to the client, the company obviously makes $0 from that client. There are a number of third-party credit screening services available to help NMT with this task. NMT is considering whether or not to hire a third-party credit screening company that would rate each new client into one of three categories: AA, A, B. The screening would cost the company $60 per client. The credit screening company has provided NMT with the following information regarding the accuracy of their process. In the past, of all clients who ended up defaulting on a loan, 10% were classied as AA, 11 30% were classied as A, and a 60% were classied as B. [Fa client did not default, the probabilities are 50%, 40%, and 10% for AA, A, and B, respectively. The following table provides the same information: Default Yes No m A 30% 40% B I50% 10% Probability of a particular credit rating (AA, A, B} given whether a client defaults or not