Two options are available for painting your house: (1) oil-based painting which

ID: 2776175 • Letter: T

Question

Two options are available for painting your house: (1) oil-based painting which costs $4800 and (2) water-based painting, which costs $3000. The estimated lives of the painting projects are 10 years and 5 years respectiviely. For either option, no salvage value is expected at the end of the repective service lives. Assume that you will keep and maintain the house for 10 years. At an interest rate of 10%, which of the following statements is correct:

1. On an annual basis, oil-based painting will cost about $850

2. On an annual basis, water-based painting is about $22 cheaper than oil based painting

3. On an annual basis, both options cost about the same

4. On an annual basis, water based painting will cost about $820

Explanation / Answer

Evaluation of painting options using Equivalent Annual Costs:

Oil-based painting

Water-based painting

Cost of Painting (A)

$ 4,800

$ 3,000

Life (Years)

Interest rate

10%

PVAF (Years , 10% ) (B)

6.14457

3.79079

Equivalent annual cost

$781.18

$791.39

3. On an annual basis, both options cost about the same