Econo-Cool air conditioners cost $1,400 to purchase, result in electricity bills
ID: 2759948 • Letter: E
Question
Econo-Cool air conditioners cost $1,400 to purchase, result in electricity bills of $700 per year, and last for 6 years. Luxury Air models cost $1,600, result in electricity bills of $230 per year, and last for 9 years. The discount rate is 21%
What are the equivalent annual costs of the Econo-Cool and Luxury Air models?
Econo-cool costs $1,400 and lasts for 6 years. The annual rental fee with the same PV is___________?
The equivalent annual cost of owning and running Econo-cool is____?
Luxury Air costs $1,600, and lasts for 9 years. Its equivalent annual rental fee is found as____?
The equivalent annual cost of owning and running Luxury Air is____?
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?
a.What are the equivalent annual costs of the Econo-Cool and Luxury Air models?
Econo-cool costs $1,400 and lasts for 6 years. The annual rental fee with the same PV is___________?
The equivalent annual cost of owning and running Econo-cool is____?
Luxury Air costs $1,600, and lasts for 9 years. Its equivalent annual rental fee is found as____?
The equivalent annual cost of owning and running Luxury Air is____?
b. 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?
Explanation / Answer
a. Present value of cash outflows in the case of Econo cool = $1400 + $700 x PVAF0.21/6
= 1400 + 700 x (1/(1+0.21)1 + 1/(1+0.21)2 + .... + 1/(1+0.21)6)
= 1400 + 700 x 3.245
= 3671.23
The equivalent annual cost of owning and running Econo-cool is = 3671.23/3.245 = $1131.35
Present value of cash outflows in the case of Luxury Air = $1600 + $230 x PVAF0.21/9
= 1600 + 230 x (1/(1+0.21)1 + 1/(1+0.21)2 + .... + 1/(1+0.21)9)
= 1600 + 230 x 3.905
= 2498.15
The equivalent annual cost of owning and running Luxury Air is = 2498.15/3.905 = 639.73
b. Rate of discount = 21%x (1+0.10)
= 23.10
Present value of cash outflows in the case of Econo cool = $1400 + $700 x PVAF0.231/6
= 1400 + 700 x (1/(1+0.231)1 + 1/(1+0.231)2 + .... + 1/(1+0.231)6)
= 1400 + 700 x 3.085
= 3559.5
The equivalent annual cost of owning and running Econo-cool is = 3559.5/3.085 = $1153.81
Present value of cash outflows in the case of Luxury Air = $1600 + $230 x PVAF0.231/9
= 1600 + 230 x (1/(1+0.231)1 + 1/(1+0.231)2 + .... + 1/(1+0.231)9)
= 1600 + 230 x 3.662
= 2442.26
The equivalent annual cost of owning and running Luxury Air is = 2442.26/3.662 = 666.92
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