Unformatted text preview: as the production technology and the output price). Question 3 (a) NPV of owning and operating the old fridge is simply the negative costs of operating the fridge for 4 years. Since the fridge consumes 1400 kWh per year and she pays $0.10 per kWh, she should expect to pay $140 per year. Hence, if we begin in year zero and apply the discount rate r = 0 . 10: NPV old =-3 X t =0 140 1 . 10 t ≈ -$488 . 16 1 (b) NPV of owning and operating he new fridge includes not only the operating costs ($60 per year, using the analogous calculation), but also the cost of purchasing the new fridge today (at t = 0) and the value of selling the used fridge in four years (at t = 3). Hence, NPV new =-3 X t =0 60 1 . 10 t-$1700 + $500 1 . 10 3 ≈ -$1533 . 55 (c) Based on the standard DUM model, we would not expect Zoe to purchase this fridge. NPV new < NPV old , meaning that keeping the old fridge saves her money. 2...
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- Spring '16
- Meredith Fowlie
- Economics, Ratio, Austrian School, factor prices