A high efficiency light bulb consumes 25 watts per hour, costs $4.25 and has an

Question

A high efficiency light bulb consumes 25 watts per hour, costs $4.25 and has an expected life of 8,000 hours. It produces the same light output as a typical incandescent light bulb that consumes 100 watts, costs $1.00 for a 4 pack and has an expected life of 1,000 hours. A 4 pack is purchased initally, and another 4 pack is purchased after two years. Either bulb will be used for 2,000 hours per year at an electricity cost of $0.14/kwh (kilowatt-hour). If the interest rate is 6%, which bulb is more cost effective over 8,000 hours of use based upon a comparision of Net Present Values?

Explanation / Answer

high efficiency bulb works for 2000hrs in a year....energy consumed in a year=25*2000=50 KWH.... electricity cost=0.14*50=7$.......for 8000 hrs of use it takes 4 years total electricity cost=4*7=28$. ..given interest rate 6% so net present value of bulb cost over 4 yrs=4.25/(1+0.06)^4=3.366 $...........total cost=31.366$....... for incandescent bulb for 8000hrs of use...energy=100*8000=800KWH.....electricity cost=800*0.14=112$

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