Econo-Cool air conditioners cost $400 to purchase, result in electricity bills of $169 per year, and last for 5 years. Luxury Air models cost $595, result in electricity bills of $138 per year, and last for 8 years. The discount rate is 25%.
a. What are the equivalent annual costs of the Econo-Cool models? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. What are the equivalent annual costs of the Luxury Air models? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Solution a:
computation of PV of cash outflows and equivalent annual cost - Econo cool Model | ||||
Particualrs | Amount | Period | PV Factor | Present Value |
Air conditioner cost | $400.00 | 0 | 1 | $400.00 |
Electricity cost | $169.00 | 1-5 | 2.689280 | $454.49 |
Total Present value of cash outflows | $854.49 | |||
Annuity factor | 2.689280 | |||
Equivalent annual cost |
$317.74 |
Solution b:
computation of PV of cash outflows and equivalent annual cost - Luxury Air Model Model | ||||
Particualrs | Amount | Period | PV Factor | Present Value |
Air conditioner cost | $595.00 | 0 | 1 | $595.00 |
Electricity cost | $138.00 | 1-5 | 3.328911 | $459.39 |
Total Present value of cash outflows | $1,054.39 | |||
Annuity factor | 3.328911 | |||
Equivalent annual cost | $316.74 |
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