Check whether buying of a refrigerator is profitable or not.
Explanation of Solution
The market value of a product is determined by its present value. With the given information, the buying price (P) of a refrigerator is $700, the salvage value (SV) is $200, rate of interest is 8 per cent, and reduction in the electricity bill (ED) is $150. Assume that the electricity bill is $350. After deducting the ED, electricity bill is $200
The PV of using the owner’s refrigerator is -$1,397.45.
The present worth (PV) of buying a new refrigerator can be calculated as follows:
The PV of buying a new refrigerator is -$1,362.42. Thus, PV of buying a new refrigerator is greater (lower cost) than using the owner’s refrigerator. Thus, the person chooses to buy a new one.
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Chapter 27 Solutions
Economics: Private and Public Choice (MindTap Course List)