GHI company wants to buy an air conditioner. There are two options in the market. The...
GHI company wants to buy an air conditioner. There are two options in the market. The discount rate is 12%. Option A: Super air conditioner cost $300 to purchase, can be used for 5 years, and the electricity bill is $150 per year. Option B: Excellent air conditioner cost $500 to purchase, can be used for 8 years, and the electricity bill is $100 per year.
a) What are the equivalent annual costs (EAC) of the Super and Excellent air conditioner models?
b) Which model is more cost-effective (with lower cost)?
c) If the inflation rate is expected to be 10% per year, redo a.) and b.)
Homework Answers
| Option A | Option B | ||
| a | EAC | $233.22 | $200.65 |
| b | Option B has lower cost |
Option c
| Option A | Option B | |
| EAC | $262.47 | $235.77 |
| Option B has lower cost | ||
Workings
| Year | Option A | Option B |
| 0 | -300 | -500 |
| 1 | -150 | -100 |
| 2 | -150 | -100 |
| 3 | -150 | -100 |
| 4 | -150 | -100 |
| 5 | -150 | -100 |
| 6 | -100 | |
| 7 | -100 | |
| 8 | -100 | |
| NPV | -840.72 | -996.76 |
| Option A | Option B | |
| EAC | $233.22 | $200.65 |
| Option B has lower cost |
| PART c | Year | Option A | Option B |
| 0 | -300 | -500 | |
| 1 | -150.00 | -100.00 | |
| 2 | -165.00 | -110.00 | |
| 3 | -181.50 | -121.00 | |
| 4 | -199.65 | -133.10 | |
| 5 | -219.62 | -146.41 | |
| 6 | -161.05 | ||
| 7 | -177.16 | ||
| 8 | -194.87 | ||
| NPV | -946.15 | -1171.20 |
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