Question

Jane is using a 10% annual interest rate to decide between three options: Model A, B or C.

	Model (A)	Model (B)	Model (C)
Initial Cost	$5,000	$2,000	$7,500
Life (years)	4	4	4
Annual Savings	$1,500	$650	$2,500

22. Would the above decision change if the product life for all three models are 5 years instead of 4 years? Would the above decision change if PW analysis is applied instead of AW analysis?
    1. Yes, for both changes
    2. Yes on 5 years, but no on PW
    3. No on 5 years, but yes on PW analysis
    4. No for both change
    5. Can’t answer this question as we need more information to compute AW and PW of the new scenarios

Answer 1

4 years:
PW:
Model A=-5000+1500/(10%/(1-1/1.10^4))=-245.2018

Model B=-2000+650/(10%/(1-1/1.10^4))=60.4125

Model C=-7500+2500/(10%/(1-1/1.10^4))=424.6636

AW:
Model A=-5000*10%/(1-1/1.10^4)+1500=-77.3540

Model B=-2000*10%/(1-1/1.10^4)+650=19.0584

Model C=-7500*10%/(1-1/1.10^4)+2500=133.9690

5 years:
PW:
Model A=-5000+1500/(10%/(1-1/1.10^5))=686.1802

Model B=-2000+650/(10%/(1-1/1.10^5))=464.0114

Model C=-7500+2500/(10%/(1-1/1.10^5))=1976.9669

AW:
Model A=-5000*10%/(1-1/1.10^5)+1500=181.0126

Model B=-2000*10%/(1-1/1.10^5)+650=122.4050

Model C=-7500*10%/(1-1/1.10^5)+2500=521.5189

Answer is Option D No for both change