Question

Brand A paint costs $1550 and should last 8 years. Brand B paint costs $2000 and should last 10 years. Which brand (A or B) is more economical for you over time if you can earn 4% compounded annually on your money?

Answer 1

Brand A Paint Costed: $ 1550 (PV); Tenure = 8 years; Discounting Factor = 4%

Equivalent Annual Cost = (Discounting Factor% * NPV)/(1 - (1 + Discounting Factor%) ^ -No.of Years

=> (4%*1550)/(1-(1+4%)^-8) = $ 230.22 Annual Cost

Brand B Paint Costed: $ 2000 (PV); Tenure = 10 years; Discounting Factor = 4%

Equivalent Annual Cost = (Discounting Factor% * NPV)/(1 - (1 + Discounting Factor%) ^ -No.of Years

=> (4%*2000)/(1-(1+4%)^-10) = $ 246.58 Annual Cost

Since the Equivalent Annual cost of Brand A is cheaper than Brand B, Brand A is more economical.

answered by: anonymous