Econo-Cool air conditioners cost $500 to purchase, result in electricity bills o

Question

Econo-Cool air conditioners cost $500 to purchase, result in electricity bills of $250 per year, and last for 7 years. Luxury Air models cost $700, result in electricity bills of $140 per year, and last for 10 years. The discount rate is 21%.

What are the equivalent annual costs of the Econo-Cool and Luxury Air models? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Now you remember that the inflation rate is expected to be 10% per year for the foreseeable future. What are the equivalent annual costs of the Econo-Cool and Luxury Air models? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Econo-Cool air conditioners cost $500 to purchase, result in electricity bills of $250 per year, and last for 7 years. Luxury Air models cost $700, result in electricity bills of $140 per year, and last for 10 years. The discount rate is 21%.

Explanation / Answer

PMT ´ annuity factor(21%,7 years) = $500

The equivalent annual cost of owning and running Econo-cool

PMT ´ annuity factor(21%,10 years) = $700

The equivalent annual cost of owning and running Econo-cool

The equivalent annual cost of owning and running Econo-cool

  Econo-cool costs $500 and lasts for 7 years. The annual rental fee with the same PV is Present Value $500.00 Rate 21% Nper 7 years PMT (Annual rental fee with the same PV) $142.53

PMT ´ annuity factor(21%,7 years) = $500

$142.53

The equivalent annual cost of owning and running Econo-cool

PMT(annual rental fee with the same PV) $142.53 Electricity Bill $250.00 equivalent annual cost of owning and running Econo-cool $392.53   Luxury Air costs $700, and lasts for 10 years. Its equivalent annual rental fee is found as Present Value $700.00 Rate 21% Nper 10 years PMT (Annual rental fee with the same PV) $172.67

PMT ´ annuity factor(21%,10 years) = $700

$172.67

The equivalent annual cost of owning and running Econo-cool

PMT(annual rental fee with the same PV) $172.67 Electricity Bill $140.00 equivalent annual cost of owning and running Luxury Air $312.67 b.Which model is more cost-effective? Econo-cool Luxury Air is more cost effective. It has the lower equivalent annual cost. c-1.Now you remember that the inflation rate is expected to be 10% per year for the foreseeable future. What are the equivalent annual costs of the Econo-Cool and Luxury Air models? (Do not round intermediate calculations. Round your answers to 2 decimal places.) The real interest rate is now: (1.21/1.10) – 1 = 0.10 = 10% Present Value $500.00 Rate 10% Nper 7 years PMT (Annual rental fee with the same PV) $102.70   Equivalent annual real cost to own Econo-cool $102.70   Plus $250 (real operating cost) $250.00

The equivalent annual cost of owning and running Econo-cool

$352.70 Present Value $700.00 Rate 10% Nper 10 years PMT (Annual rental fee with the same PV) $113.92   Equivalent annual real cost to own Luxury Air $113.92   Plus $140 (real operating cost) 140 equivalent annual cost of owning and running Luxury Air $253.92 Luxury Air is still more cost effective. It has the lower equivalent annual cost.

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