Answer:
the net present value of the microwave oven is $196.76. This means that over a period of 5 years, you can expect to save a net amount of $196.76 by purchasing this microwave oven at a cost of $177 and realizing annual savings of $86.
Explanation:
To calculate the net present value (NPV) of the microwave oven, you need to first calculate the present value of the annual savings, then subtract the cost of the microwave. The present value of an annuity can be calculated using the formula PV = PMT * [(1 - (1 / (1 + r)^n)) / r], where PV is the present value, PMT is the payment amount, r is the interest rate, and n is the number of periods.
In this case, PMT is the annual savings of $86, r is the average return on your savings of 4 percent (or 0.04), and n is the number of years over which you will realize these savings, which is 5. Plugging these values into the formula, we have PV = 86 * [(1 - (1 / (1 + 0.04)^5)) / 0.04] = $373.76.
The NPV of the microwave oven is then calculated by subtracting its cost from the present value of its annual savings: NPV = 373.76 - 177 = $196.76.