Question

Problem 4: PRACTICE PROBLEM ON CAPITAL BUDGETING TECHNIQUES: EQUIVALENT ANNUITY

Low-energy light bulbs typically cost $3.60, have a life of 9 years, and use about $2.00 in electricity a year. Conventional light bulbs are less expensive, since they cost only $0.60, but they last only a year and use about $7.00 in electricity. If the discount rate is 4%, which product is cheaper to use? (hint: first determine the NPV of the costs associated with each type of light bulb, and then convert this NPV into an equivalent annuity, or an equivalent annual cost).

Answer 1