Show work. Quinton needs a new refrigerator. He has two choices a basic one, or

Question

Show work.

Quinton needs a new refrigerator. He has two choices a basic one, or a more efficient one from Energy Star. He earns 4% compounded annually on his investments, he wants to consider a 10-year planning horizon, and he will use present worth analysis to the determine the best alternative.

Basic Unit: Initial Cost 700, Delivery 60, Servicing (Year 5) 100, Annual energy costs 120, Salvage value (Year 1) 150.

Energy Star: Initial Cost 800, Delivery 60, Servicing (Year 5) 100, Annual energy costs 55, Salvage value (Year 1) 175.

Explanation / Answer

Equated annual costs of Basic unit: Present value of initial cost =                                700 Prsent value of delivery cost =                               60 Present value of servicing cost =                            82.20                             (100*PVIF5,4%)= (100*0.822) PV of energy costs =                                             973.32                                          (120*PVIFA10,4%)= (120*8.111) Less: PV of salvage value=                                    (144.30) (150*PVIF1,4%) = (150*0.962) Total Present Value of the refregerator =                 1,671.22    Equated annual cost = Total present value/PVIFA(10,4%)                                     = 1671/8.111 = $206.04 Option2: Equated annual costs of Energy Star: Present value of initial cost =                                 800 Prsent value of delivery cost =                               60 Present value of servicing cost =                            82.20                             (100*PVIF5,4%)= (100*0.822) PV of energy costs =                                             446.105                                          (55*PVIFA10,4%)= (55*8.111) Less: PV of salvage value=                                    (168.35) (175*PVIF1,4%) = (175*0.962) Total Present Value of the refregerator =                 1,219.955    Equated annual cost = Total present value/PVIFA(10,4%)                                     = 1219.955/8.111 = $150.41 Decision: The Equated annual cost of Energy Star is less than Basic unit. Hence it is advised to purchase Energy Star. Equated annual costs of Energy Star: Present value of initial cost =                                 800 Prsent value of delivery cost =                               60 Present value of servicing cost =                            82.20                             (100*PVIF5,4%)= (100*0.822) PV of energy costs =                                             446.105                                          (55*PVIFA10,4%)= (55*8.111) Less: PV of salvage value=                                    (168.35) (175*PVIF1,4%) = (175*0.962) Total Present Value of the refregerator =                 1,219.955    Equated annual cost = Total present value/PVIFA(10,4%)                                     = 1219.955/8.111 = $150.41 Decision: The Equated annual cost of Energy Star is less than Basic unit. Hence it is advised to purchase Energy Star.

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