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?

Question

Business

Leslie Wood

12 August, 05:24

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?

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Answers (1)

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Christian Yu · Answer 1

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).