Question

URGENT!!!

Econo-Cool air conditioners cost $355 to purchase, result in electricity bills of $161 per year, and last for 5 years. Luxury Air models cost $555, result in electricity bills of $122 per year, and last for 8 years. The discount rate is 20%. a. What is the equivalent annual cost of the Econo-Cool model? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Econo-Cool Equivalent annual cost b. What is the equivalent annual cost of the Luxury Air model? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Luxury Air Equivalent annual cost c. Which model is more cost-effective? Econo-Cool Luxury Air d-1. Now you remember that the inflation rate is expected to be 10% per year for the foreseeable future. What is the equivalent annual cost of the Econo-Cool and Luxury Air model? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Econo-Cool Luxury Air Equivalent annual cost d-2. Which model is more cost-effective? Econo-Cool Luxury Air

Answer 1

A В C D Е Econo cool Luxury air 2 Investment cost Annual cost $355 $555 $161 $122 Expected life Cost of capital Equivalent annual cost 5 8 6 20% 20% 7 279.70 266.64 8 9 Working note: 10 Year PV factor @ 20% 11 0.8333 12 0.6944 2 13 0.5787 14 0.4823 4 15 0.4019 5 16 0.3349 17 7 0.2791 18 8 0.2326 19 PVIFA(20%,8) 20 PVIFA(20%,5) 3.8372 2.9906 21 22 a) Equivalent annual cost of Econo cool model $279.70 23 24 25 b) Equivalent annual cost of luxury air model $266.64 26 27 28 c) More cost effective model is Luxury air model. 29 LLU ON00 LO LO

A В C E New discount rate 20* (1+10%) = 22% 1 Econo cool Luxury air 2 Investment cost Annual cost Expected life Cost of capital Equivalent annual cost $350 $555 3 $161 $122 4 5 5 8 6 22% 22% 7 271.52 275.35 9 Working note: 10 Year PV factor @ 22% 11 0.8197 12 2 0.6719 13 0.5507 14 0.4514 4 15 5 0.3700 16 6 0.3033 17 7 0.2486 18 0.2038 19 PVIFA(22%,8) 20 PVIFA(22%,5) 3.6193 3.1669 21 22 d-1) 23 Equivalent annual cost of Econo cool model $271.52 24 Equivalent annual cost of luxury air model $275.35 25 26 27 d-1)More cost effective is econo cool model 28 LLI st LO st LO

Excel formula:

В C D 1 Econo cool Luxury air 2 Investment cost $355 $555 3 Annual cost $161 $122 Expected life Cost of capital Equivalent annual cost 5 0.2 0.2 6 (355/B20)+161 (555/B19)+122 7 8 9 Working note: 10 Year PV factor @ 20% 11 1 =1/(1.2)^A11 =1/ (1.2)^A12 12 2 13 3 =1/(1.2)^A13 =1/(1.2)^A14 =1/(1.2)^A15 = 1/ (1.2)^A16 = 1/ (1.2)^A17 1/(1.2)^A18 14 4 15 5 16 6 17 7 18 8 19 PVIFA(20%,8) 20 PVIFA(20%,5) SUM(B11:B18) B11+B12+B13+B14+B15 21 st LO

A В D New discount rate 20 * (1+10%) 22% 1 Luxury air $555 2 Еcono cool Investment cost Annual cost $350 3 $161 $122 Expected life Cost of capital Equivalent annual cost 5 0.22 | =(350/B20)+161 5 8 0.22 6 | =(555/B19)+122 7 8 9 Working note: 10 Year PV factor @ 22% 11 1 = 1/(1.22)^A11 =1/(1.22)^A12 12 2 13 3 =1/(1.22)^A13 =1/(1.22)^A14 14 4 =1/(1.22)^A15 =1/ (1.22)AA16 =1/ (1.22)^A17 = 1/ (1.22)^A18 15 5 16 6 17 7 18 8 19 PVIFA(22%,8) 20 PVIFA(22%,5) -SUM(B11:B18) B11+B12+B13+B14+B15+B16 21