Question

Suppose each refrigerator lasts for 10 years. Refrigerator A’s annual energy cost is $100 and refrigerator B’s annual energy cost is $150. How much extra should household be willing to pay for refrigerator A compared to refrigerator B to be exactly indifferent between the two. Assume a 5% discount rate and begin in the current year.

Answer 1

Extra amount willing to pay for Refrigerator-A is $ 386.

Explanation:

Present value of Annual cash outflows in REF-B ($ 150*Annuity factor for 10th year i.e.7.7217 at 5%)										1158.255
Present value of Annual cash ouutflows in Ref-A ($100 *Annuity factor for 10th years @5% i.e.7.7217)										772.17
			Difference in present value of cash outflows in 10 years							386.085
	Therefore, the additional amount willing to pay for Ref-A is $386