Question

You are considering two home security companies for your new house. The first company offers free installation and equipment, but will charge you $470.00 per year forever. The second company charges $814.00 for installation, but will charge you $222.00 per year forever. Assume that payments are at the END of the year. Your personal interest rate is 5.00% per year, and you want to evaluate each proposal. What is the PV of the paid installation? (This answer will be a NEGATIVE as you are spending cash for the system without receiving any payoffs)

Answer 1

The second option is the cheapest.

Step-by-step explanation:

Giving the following information:

The first company offers free installation and equipment but will charge you $470.00 per year forever. The second company charges $814.00 for installation but will charge you $222.00 per year forever. Assume that payments are at the END of the year. Your interest rate is 5.00% per year, and you want to evaluate each proposal.

To evaluate each proposal, we need to use the perpetual annuity formula:

PV= D/i

D= annual payment

First option:

PV= -470/0.05= -9400

Second option:

PV= -814 - 222/0.05= -5254

The second option is the cheapest.