You wish to buy a new lawnmower and you are deciding between a gas powered lawn mower and an electric mower.The electric mower costs $275 more than the gas mower,but you estimate that it will save you $40 per year by using cheaper electricity relative to gasoline.If the expected lifetime of both mowers is 30 years,and the cost of capital of 5%,what is the NPV of getting an electric mower instead of a gas mower?
A)$40
B)$340
C)-$235
D)-$275
E)$925

Question

Quizplus · Accepted Answer

We can calculate the NPV of the electric mower as follows:

Initial Cost: $275 (more than gas mower)
Annual Savings: $40
Expected Lifetime: 30 years

Using a discount rate of 5%, we can calculate the present value of the annual savings over 30 years:

PV of Annual Savings = $40 / (1 + 0.05)^1 + $40 / (1 + 0.05)^2 + ... + $40 / (1 + 0.05)^30
PV of Annual Savings = $734.72

Now, we can calculate the NPV:

NPV = -$275 + $734.72
NPV = $459.72

Since the NPV is positive, it means that the electric mower is a better investment than the gas mower, even though it costs more initially. Therefore, the best choice is to get the electric mower.

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