Air conditioners cost $300 to purchase, result in electricity bills of $150 per

Question

Air conditioners cost $300 to purchase, result in electricity bills of $150 per year, and last for 5 years. The discount rate is 20 percent. Should you replace your current air conditioner which costs $270 per year to run?

A: Do not replace - the equivalent annual cost of the new AC is $350

B: Replace - the equivalent annual cost of the new AC is $210

C: Do not replace - the equivalent annual cost of the new AC is $330

D: Replace - the equivalent annual cost of the new AC is $150

E: Replace - the equivalent annual cost of the new AC is $250

Explanation / Answer

PV = 748.59, FV = 0, N = 5, rate = 20%

use PNT function in Excel

equivalent annual cost for new ac = 250

E: Replace - the equivalent annual cost of the new AC is $250

Discount rate 20.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow                     300.00 0                                   300.00                                300.00                  150.000 1                                   125.00                                425.00                  150.000 2                                   104.17                                529.17                  150.000 3                                     86.81                                615.97                  150.000 4                                     72.34                                688.31                  150.000 5                                     60.28                                748.59

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