Econo-Cool air conditioners cost $1,600 to purchase, result in electricity bills

Question

Econo-Cool air conditioners cost $1,600 to purchase, result in electricity bills of $800 per year, and last for 8 years. Luxury Air models cost $1,800, result in electricity bills of $250 per year, and last for 11 years. The discount rate is 21%. a. What are the equivalent annual costs of the Econo-Cool and Luxury Air models? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Econo-cool costs $1,600 and lasts for 8 years. The annual rental fee with the same PV is $ The equivalent annual cost of owning and running Econo-cool is $ Luxury Air costs $1,800, and lasts for 11 years. Its equivalent annual rental fee is found as $ The equivalent annual cost of owning and running Luxury Air is $ b. Which model is more cost-effective? Econo-cool Luxury Air c-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? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Equivalent annual real cost to own Econo-cool $ Plus $800 (real operating cost) 800.00 $ Equivalent annual real cost to own Luxury Air $ Plus $250 (real operating cost) 250.00 $

Explanation / Answer

The annual cost can be calculated using annuity formula to the present value of all cost.

Econ

Present Value = 1600+ 800(1 -1.21-8) / 0.21

PV = 4580.46

The annual cost P, can be calculated as:

4580.46 = P(1-1.21-8) / .21

P=$1229.46

Similarly the present value of second model is:

PV = 1800+250(1 -1.21-11) / 0.21

PV = 2844.23

The annual cost P, can be calculated as:

4580.46 = P(1-1.21-8) / .21

P=$680.93

(b) Dedinitely second model, Luxury air is more cost efffective since annual cost is smaller plus it lasts for 11 years.

Now the annual cost with inflation is:

Econ

P(1-1.21-8) / 0.21 = 1229.46 ( 1-1.1-8) / 0.1

P=1.431 x 1229.46

P= $1760.55

Luxury

P = 1.431 x680.93

P=$975.07

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