You are in the market for a new refrigerator for your company’s lounge. You have

ID: 2773957 • Letter: Y

Question

You are in the market for a new refrigerator for your company’s lounge. You have narrowed the search down to 2 models. The energy efficient model sells for $700 and will save you $45 at the end of each of the next 5 years in electricity costs. The standard model has the same features as the energy efficient model, but no savings in electricity costs. It is priced only at $500. Assuming that the discount rate is 6% and each refrigerator will last 5 years (and have the same scrap value), which refrigerator should you purchase

Explanation / Answer

Evaluation of Purchase options:

Energy efficient model:

Year

Cash Flows (CF)

PVF(6%)

PV = CF*PVF

Cost of the refrigerator

$ 700.00

Saving

1 to 5

$ (45.00)

$ (189.56)

Net Present cost

$ 510.44

Standard model:

Net Present cost

$ 500.00

The Net present cost of Standard model is less than Energy efficient model , hence Standard model refrigerator should be purchased