Question

Econo-Cool air conditioners cost $350 to purchase, result in electricity bills of $160 per year, and last for 5 years. Luxury Air models cost $550, result in electricity bills of $120 per year, and last for 8 years. The discount rate is 21% a. What is the equivalent annual cost of the Econo-Cool model? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Econo-Cool Equivalent annual cost b. What is the equivalent annual cost of the Luxury Air model? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Luxury Alr Equivalent annual cost C. Which model is more cost-effective? Econo-Cool Luxury Air d-1. Now you remember that the inflation rate is expected to be 10% per year for the foreseeable future. What is the equivalent annual cost of the Econo-Cool and Luxury Air model? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Econo-Cool Luxury Air Equivalent annual cont d-2. Which model is more cost-effective? Econo-Cool Luxury Air

Answer 1

a]

EAC = (NPV * r) / (1 - (1 + r)^-n),

where NPV = net present value

r = discount rate

n = number of years

NPV is calculated as the sum of present values of each cash flow

EAC = -$279.62

А 1 Year 0 600 van WN B C D E Purchase Cash PV of Cash Cost Electricity Flow Flow ($350) ($350) ($350.00) ($160) ($160) ($132.23) ($160) ($160) ($109.28) ($160) ($160) ($90.32) ($160) ($160) ($74.64) ($160) ($160) ($61.69) ($818.16) EAC ($279.62) NPV

А В D Cash Flow =B2 1 Year 2 0 3 1 42 Purchase Cost Electricity -350 -160 -160 -160 -160 -160 =C4 PV of Cash Flow =D2/(1+21%)^A2 =D3/(1+21%)^A3 =D4/(1+21%) A4 =D5/(1+21%)^A5 =D6/(1+21%)^A6 =D7/(1+21%)^A7 =SUM(E2:E7) =(E8*21%)/(1-(1+21%)^-5) =C6 =C7 NPV EAC

b]

EAC = (NPV * r) / (1 - (1 + r)^-n),

where NPV = net present value

r = discount rate

n = number of years

NPV is calculated as the sum of present values of each cash flow

EAC = -$267.63

AB E Purchase PV of Cash 14 Year Cost Electricity Cash Flow Flow 15 0 ($550) ($550) ($550.00) 16 ($120) ($120) ($99.17) ($120) ($120) ($81.96) ($120) ($120) ($67.74) ($120) ($120) ($55.98) ($120) ($120) ($46.27) ($120) ($120) ($38.24) ($120) ($120) ($31.60) ($120) ($120) ($26.12) NPV ($997.07) EAC ($267.63)

AB D Electricity Purchase Cost -550 14 Year 15 0 16 1 17 2 18 194 -120 -120 -120 -120 -120 -120 -120 -120 Cash Flow =B15 =C16 =C17 =C18 =C19 =C20 =C21 =C22 =C23 NPV EAC PV of Cash Flow =D15/(1+21%)^A15 =D16/(1+21%)^A16 =D17/(1+21%)^A17 =D18/(1+21%)^A18 =D19/(1+21%)^A19 =D20/(1+21%)^A20 =D21/(1+21%)^A21 =D22/(1+21%)^A22 =D23/(1+21%)^A23 =SUM(E15:E23) =(E24*21%)/(1-(1+21%)^-8) 20 25

c]

Luxury Air is more cost-effective as it has a lower EAC

d-1]

Electricity bills of each year are adjusted for inflation.

EAC of Econo-Cool is -$308.06

EAC of Luxury Air is -$303.84

1 2 A B C D Purchase PV of Cash Year Cost Electricity Cash Flow Flow 0 ($350) ($350) ($350.00) ($160) ($160) ($132.23) ($176) ($176) ($120.21) ($194) ($194) ($109.28) ($213) ($213) ($99.35) ($234) ($234) ($90.32) NPV ($901.39) EAC ($308.06) Purchase PV of Cash 14 Year Cost Electricity Cash Flow Flow 0 ($550) ($550) ($550.00) 16 1 ($120) ($120) ($99.17) ($132) ($132) ($90.16) ($145) ($145) ($81.96) ($160) ($160) ($74.51) ($176) ($176) ($67.74) ($193) ($193) ($61.58) ($213) ($213) ($55.98) ($234) ($234) ($50.89) NPV ($1,131.99) EAC ($303.84)

А в Electricity Purchase Cost -350 Cash Flow =B2 1 Year 20 3 1 4 2 5 3 =C3 -160 =C3*(1+10%) =C4*(1+10%) C5*(1+10%) =C6*(1+10%) =C4 =CS =C6 =C7 NPV EAC PV of Cash Flow =D2/(1+21%)^A2 =D3/(1+21%)^A3 =D4/(1+21%)^A4 =D5/(1+21%)A5 =D6/(1+21%)^A6 =D7/(1+21%)^A7 =SUM(E2:E7) =(E8*21%)/(1-(1+21%)^-5) 13 Electricity Purchase Cost -550 14 Year 15 O 16 1 17 2 18 3 19 4 20 5 21 6 227 23 8 -120 =C16*(1+10%) =C17*(1+10%) =C18*(1+10%) =C19*(1+10%) =C20*(1+10%) =C21*(1+10%) =C22*(1+10%) Cash Flow =B15 =C16 =C17 =C18 =C19 =C20 PV of Cash Flow =D15/(1+21%)^A15 =D16/(1+21%)^A16 =D17/(1+21%)^A17 =D18/(1+21%)^A18 =D19/(1+21%)^A19 =D20/(1+21%)^A20 =D21/(1+21%)^A21 =D22/(1+21%)^A22 =D23/(1+21%)^A23 -SUM(E15:E23) =(E24*21%)/(1-(1+21%)^-8) =C21 24 =C22 =C23 NPV EAC 25

d-2]

Luxury Air is more cost-effective as it has a lower EAC