Econo-Cool air conditioners cost $1,300 to purchase, result in electricity bills

Question

Econo-Cool air conditioners cost $1,300 to purchase, result in electricity bills of $650 per year, and last for 5 years. Luxury Air models cost $1,500, result in electricity bills of $220 per year, and last for 8 years. The discount rate is 21%. a. 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 costs $1,300 and lasts for 5 years. The annual rental fee with the same PV is $ The equivalent annual cost of owning and running Econo-cool is = $ Luxury Air costs $1,500, and lasts for 8 years. Its equivalent annual rental fee is found as $ The equivalent annual cost of owning and running Luxury Air is = $ ________________________________________ 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.) Equivalent annual real cost to own Econo-cool= $ Plus $650 (real operating cost) 650.00 = ________________________________________ $ ________________________________________________________________________________ Equivalent annual real cost to own Luxury Air= $ Plus $220 (real operating cost) 220.00 ________________________________________ is = $

Explanation / Answer

Econo-cool costs $1300 and lasts for 5 years. The annual rental fee with the same PV is $444.30. We solve as follows: PMT * annuity factor(21%,5 years) = $1300 PMT *2.92598 = 1300 So PMT = $444.30 The equivalent annual cost of owning and running Econo-cool is: $444.30 + $650 = $1,094.30 Luxury Air costs $1500, and lasts for 8 years. Its equivalent annual rental fee is found as follows: PMT *annuity factor(21%,8 years) = $1500 So PMT* 3.72558 = $1500 So PMT = 402.62 The equivalent annual cost of owning and operating Luxury Air is: 402.62 + $220 = 622.62 b. Luxury Air is more cost effective. It has the lower equivalent annual cost. c. The real interest rate is now: (1.21/1.10) – 1 = 0.10 = 10% Redo (a) and (b) using a 10% discount rate. (Note: Because energy costs would normally be expected to inflate along with all other costs, we should assume that the real cost of electric bills is either $220 or $650, depending on the model.) Econo-cool costs $1300 and lasts for 5 years. The annual rental fee with the same PV is $342.94. We solve as follows: PMT * annuity factor(10%,5 years) = $1300 PMT * 3.79079 = 1300 So PMT = $342.94 The equivalent annual cost of owning and running Econo-cool is: $342.94 + $650 = $992.94 Luxury Air costs $1500, and lasts for 8 years. Its equivalent annual rental fee is found as follows: PMT *annuity factor(10%,8 years) = $1500 So PMT* 5.33493 = $1500 So PMT = 281.17 The equivalent annual cost of owning and operating Luxury Air is: 281.17 + $220 = 501.17 Luxury Air is still more cost effective.

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