Present Values

Jul 2010
9
0
Consumer durable model A is £1500.
It lasts 4 years
Maintenance £200 for the first 2 years, £250 for the third year, and £400 for the fourth (assumed payable at the end of the year).
At the end sell it for £500.

Model B is £1400 but I can get a discount of 10%
£250 per year Maintenance for each of the 4 years that it lasts (again paid at the end of the year),
l have to pay the council £50 to take it away.

Using present value methods, and assuming a discount rate of 15%, which of the two models would you recommend me to buy?

Does anyone have any idea how to calculate this and if so could you point me in the right direction at least please. Thanks
 
Dec 2007
3,184
558
Ottawa, Canada
Consumer durable model A is £1500. It lasts 4 years
Maintenance £200 for the first 2 years, £250 for the third year, and £400 for the fourth (assumed payable at the end of the year).
At the end sell it for £500.

Model B is £1400 but I can get a discount of 10%
£250 per year Maintenance for each of the 4 years that it lasts (again paid at the end of the year),
l have to pay the council £50 to take it away.
Flows, model A (1,2,3,4 years): -200, -200, -250, -400+500=+100
Flows, model B (1,2,3,4 years): -250, -250, -250, -250-50=-300

Present Value each flow, add 'em up, compare to purchase price: pick best of the 2.

Example of PV calculation, using 3rd year -250: -250 / 1.15^3
 
Jul 2010
9
0
Example of PV calculation, using 3rd year -250: -250 / 1.15^3
Rite I sort of understand what your getting at....

Say for example I was just analysing Model A to start with woulld it be:

(-200/1.15^3) + (-200/1.15^3) + (-250/1.15^3) + (100/1.15^3) = -243.28

and then how do I compare it to the original purchase price?

-243.28/1500*100??????? = roughly - 16

And If Im working correctly up to this point say the other one equalled - 18 (it doesnt) but whiich model would I pick?
 
Dec 2007
3,184
558
Ottawa, Canada
Rite I sort of understand what your getting at....
Say for example I was just analysing Model A to start with woulld it be:
(-200/1.15^3) + (-200/1.15^3) + (-250/1.15^3) + (100/1.15^3) = -243.28
and then how do I compare it to the original purchase price?
-243.28/1500*100??????? = roughly - 16
And If Im working correctly up to this point say the other one equalled - 18 (it doesnt) but whiich model would I pick?
NO! Wonder why you're given this problem: you seem unaware of the simple basics...
That should be:
(-200/1.15^1) + (-200/1.15^2) + (-250/1.15^3) + (100/1.15^4) = x

Then purchase price - x

I suggest you LEARN by googling "present value of annuity".
 
Jul 2010
9
0
NO! Wonder why you're given this problem: you seem unaware of the simple basics...
That should be:
(-200/1.15^1) + (-200/1.15^2) + (-250/1.15^3) + (100/1.15^4) = x

Then purchase price - x

I suggest you LEARN by googling "present value of annuity".
I did as you suggested for both models and got the following answers:

A = 1932.35
B = 2002.33

Therefore I assume that I advise them to buy model B correct?