Reference no: EM132675716

Low-energy light bulbs typically cost $3.60, have a life of nine years, and use about $2.00 of electricity a year. Conventional light bulbs are cheaper to buy, and they cost only $0.60. On the other hand, they last for only a year and use about $7.00 of energy in a year. The discount rate (i.e., interest rate in APR) is 4%. You are deciding whether you should save money today by keeping using cheaper conventional light bulbs that will not last as long, or you should buy the low-energy light bulbs.

(a) Because both types of light bulbs generate about the same amount of light, the only way to choose between them is on the basis of cost. More precisely, the equivalent annual cost (EAC). Can you calculate the low-energy light bulb's EAC, which is the night-year annuity with the same present value as its lifetime costs?

(b) Can you also calculate the conventional light bulb's EAC, which is the one-year annuity with the same present value as its lifetime costs?

(c) Which product is cheaper to use?