You are in need of a new air conditioner. Some new air conditioners cost less bu

Question

You are in need of a new air conditioner. Some new air conditioners cost less but are less efficient. That is, they consume a lot of electricity per unit of cooling power. Others cost more but are more efficient. Assume you are choosing between the following two air conditioners. Air Conditioner A costs $8,000 and uses $110.00 per month in electricity. Air Conditioner B costs only $6,000 and uses $135.00 per month in electricity. For simplification, assume that the consumer pays each year's electricity bill at the beginning of each year annually Le $110.00 per month = $1,320 per year for electricity). Also assume that the air conditioners are equivalent in terms of cooling power, so that they yield the same flow of benefits, and that both air conditioners will last for eight years with no resale value. What should the consumer do if the interest rate is 4 percent? If the interest rate is 4 percent, then the consumer should choose What if the interest rate is 10 percent? If the interest rate is 10 percent, then the consumer should choose

Explanation / Answer

Using present discounted value method, Air conditioner A costs $23,597.84 and Air conditioner B costs $23,735.54 when the interest rate is 4 percent. Hence, AC A must be chosen.

When the interest rate is 10 percent ,  Air conditioner A costs $33,753.62 and Air conditioner B costs $33,240.28

Hence, AC B must be chosen.

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