Econo-Cool air conditioners cost $315 to purchase, result in electricity bills o

Question

Econo-Cool air conditioners cost $315 to purchase, result in electricity bills of $153 per year, and last for 5 years. Luxury Air models cost $515, result in electricity bills of $106 per year, and last for 8 years. The discount rate is 23%. 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.) Equivalent annual cost Econo-Cool $ Luxury Air $ 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 cost Econo-Cool $ Luxury Air $ c-2. Which model is more cost-effective? Econo-Cool Luxury Air

Explanation / Answer

1) Calculation of Equivalent Annual costs :

Present value of Cost of Econo-Cool AC = 315 + 153 * (PVAF@23%,5years)

= 315 + 153 * 2.803

= $743.86

Equivalent annual cost of Econo-cool = $743.86 / 2.803

= $265.38

Present value of cost of Luxury AC = 515 + 106 * (PVAF@23%,8years)

= 515 + 106 * 3.517

= $887.80

Equivalent annual cost of Luxury Ac   = $887.80 / 3.517

= $252.43

Conclusion : So that Luxury AC is Cost effective,Since it's Equivalent annual cost was lower than Econo-Cool AC

2) Calculation of Equivalent annual cost with inflation rate of 10% :

  Present value of Econo - Cool :  

Equivalent Annual cost for ECONO-COOL AC = 869.024 / 2.8034

= $309.9812

Present value of Luxury Ac :

Equivalent Annual cost of Luxury AC = 1044.932 / 3.5180

= $297.0315

Conclusion : So that even in inflation also Luxury AC is Cost Effective.

Year Cash flow($) CF with inflation@10% PV factor@23% Present value($) 0 315 315 1 315 1 153 168.30 0.8130 136.8293 2 153 185.13 0.6609 122.3676 3 153 203.643 0.5374 109.4345 4 153 224.0 0.4369 97.8682 5 153 246.41 0.3552 87.5244 Total PV 2.8034 869.024

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