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 discount rate is 21 percent.
a. What are the equivalent annual costs of the Econo-cool and Luxury Air models? Which model is more cost effective?
b. Now you remember that the inflation rate is expected to be 10 percent per year for the foreseeable future. How does the inflation rate affect the evaluation of the two air conditioners?