Question

Econo-Cool air conditioners cost $330 to purchase, result in electricity bills of $156 per year, and last for 5 years. Luxury Air models cost $530, result in electricity bills of $112 per year, and last for 8 years. The discount rate is 20%. a. What is the equivalent annual cost of the Econo-Cool model? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. What is the equivalent annual cost of the Luxury Air model? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. Which model is more cost-effective? Econo-Cool Luxury Air d-1. Now you remember that the inflation rate is expected to be 10% per year for the foreseeable future. What is the equivalent annual cost of the Econo-Cool and Luxury Air model? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d-2. Which model is more cost-effective? Econo-Cool Luxury Air

Answer 1

We have to use present value method to find out which of the above ACs are cost effective.

Here as per year electricity bill is same so we can use annuity as discounting for finding out the present value.

So present value of ECO Cool Ac's electricity bill will be $156 x PVIFA ( 20%,5) = 156 x 2.991 = $466.60

so total presnt cost will be = 330 + 466.60 = $796.6

anuual cost will be = 796.6/5 = 159.32

Now for Luxuary one the cost of electiricty will be = $ 112 x PVIFA (20%,8) = 112 X 3.837 = $429.744

TOTAL cost of luxuary one will be = 429.74 + 530 = $959.74

annual luxuary one cost will be $959.74/8 = $119.97

So luxuary one is better .

For inflation one you can increase the electiricity charges by 10% every year. but here i am not able to understand that from year one i have to increase or form 2nd year keeping 1st as a base .

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