Econo-Cool air conditioners cost $300 to purchase, result in electricity bills of $150 per year, and last for 5 years. Luxury Air models cost $500, result in electricity bills of $100 per year, and last for 8 years. The (nominal) discount rate is 21%.
a. What are the equivalent annual costs of both models?
b. Which model is more cost effective?
c. Suppose the inflation rate is 10%. Redo parts a. and b. [Hint: Find the real rate.]