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    1. Homey-Livin’ (HL) rents household appliances and gives customers the option of converting the rental into a purchase. For a washer-dryer system, HL signs 8,000 new leases every year. The rental term is 3 years. A contract ends in one of the following three ways:

      • - The customer converts the rental into a purchase at the end of 2 years. (30% of the

        customers take this option.)
      • - The customer converts the rental into a purchase at the end of the 3 years. (20% of the

        customers take this option.)
      • - The customer does not convert the rental into purchase and returns the system after 3


        HL regularly buys new washer-dryer systems to offset units sold to customers or those deemed to be in too poor condition to rent again. In order to provide fast service to new rental customers, HL’s policy is to hold an inventory of 2,000 systems at its warehouse.

      1. a) What is the average number of systems that HL owns?

      2. b) HL charges $500 per year for a rental. Customers buying the system after two years of renting pay $1,800, and those buying after three years of renting pay $1,400. What is the annual revenue of HL?

      3. c) How would your answer to part b) change if the rental charge is $500 per year for the first two years but only $400 for the third year?


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