Question

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

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
1. 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

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

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