Question

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.)

Answer 1

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