You usually go to the theater to see a lot of movies. Now you are considering bu

Question

You usually go to the theater to see a lot of movies. Now you are considering buying a DVD player and renting movies instead. You currently pay $9 per movie when you go to the theater but if you buy the DVD player you will have to pay only $5 per movie rental. You estimate that the DVD player will cost $400 (at t = 0) and will last 3 years. Except for cost, you are indifferent to seeing movies at home or in the theater. Assume that the cost of theater tickets and rental payments occur at the end of each month and that you use the DVD player only to watch movies. Assume that you watch the same number of movies every month. Your discount rate is 1% per month. Assume that there is no inflation. How many movies per month must you watch for the DVD player purchase to be a smart purchase?

Explanation / Answer

Let the number of movies to watch every month = X

To justify the purchase, PV of cash outflows= PV of savings

Hence

400 = (9-5)*X* (P/A,1%,36 months)

400 = 4X*30.107

X= 3.32 rounded off to 3 movies a month

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