Question

You are in the market for a new refrigerator for your company's lounge, and you have narrowed the search down to two models. The energy-efficient model sells for $1700 and will save you $45 at the end of each of the next five years. The standard model has features similar to the energy-efficient model but provides no future electricity savings. It is priced at only $1500. Assuming your opportunity cost of funds is 6%, which refrigerator should you purchase?

Answer 1

Answer:

Refrigerator(2)

Explanation:

Particular                               Refrigerator(1)        Refrigerator(2)

Cost                                           $1,700                   $1500

Less: Saving                              $225                        $0    

                                                 $1475                    $1500  

Less: Opportunity Cost             $0                          $60    

Total Investment                        $1,475                  $1,440

Calculation of Saving = 45 x 5 = 225

Calculation of Opportunity cost = [(1700-1500)6%] x 5 = 60

Total Investment of Refrigerator(2) is lesser than Refrigerator(1)

So , we should Purchase Refrigerator(2).