Question

Don Garlits is a landscaper. He is considering the purchase of a new commercial lawn mower, either the Atlas or the Zippy. Information about both is listed below and each has a chance to be bought at a high, medium or low price:

	Atlas		Zippy
Initial Cost	$25,000		$20,000
	Probability	Revenue	Probability	Revenue
Net Revenue given in PW	0.30	$40,000	0.15	$45,000
	0.40	$30,000	0.40	$22,000
	0.30	$15,000	0.45	$18,000

Assuming both options are statistically independent of each other,

a. Calculatetheexpectedpresentvalueforeachoption.[5points]

b. Calculate the variance in the NPV for each option. [5 points]
c. Whichlawnmowershouldbechosen?Why?[1+1points]

Answer 1

Ptlos Zi PPY Ian hestid Pevene C0.30x40000 (b.Hox30000) lo. 30 x 15000) o.15x 45,000) +0.40x22000) +0.45x1Ree0) 28500 23650 rutal fest Lafort NPV $25000 $ 20,000 $3650 3 S00

uldien f Varian in the NPv for Value (x-3) Breh X $39.675m 15000 $132.25 m 3500 11S00 0.30 0.40 ర00 35o0 కం 0.90 mm 2.25 m 54.675 m $182.25 m Voranel Itd Daratien-95.25 mlen lo, 000 -13500 3500 0.30 95.25m m $9760 aenlation larumt in th NPy erZfy x- Nalae X $68.373m 1.0R9 mm 21350 -1650 O15 2 Soo0 36ం $2.7225 m 0.40 D.45 3650 2o00 $14.36 m $83.822 m 31.9225m 5650 3650 2000 3,822 mlln 155 td Duration a

Part (c)

Zippy should be purchased as it has a higher NPV compared to atlas and a lower standard deviation (i.e. risk) as compared to atlas.