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Economics NPV Problem

  1. Mar 6, 2015 #1
    I hope that I am posting this in the right place, I wasn't sure where to post this question!

    Chris is renting a house, and it does not have a refrigerator. A refrigerator is worth $3 every day because Chris will eat out less. Chris has a discount rate of 18%. Refrigerators usually last 5 years. Lowe’s is offering a financing deal with 10% downpayment and payments spread over five years. Every year of payments equals 25% of the purchase price. At these terms, how much is Chris willing to spend on the fridge?

    I am so confused on this problem. My professor already gave us the solution, but he did it in an excel spreadsheet and I need to know how to do it by hand for my upcoming midterm. I think what he did in the spreadsheet was adjust the cost until he got an NPV of 0. This is what he calculated Chris was willing to spend: $3886.

    Thanks for any help!
  2. jcsd
  3. Mar 7, 2015 #2


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    Homework Helper
    Gold Member

    Say Chris is prepared to pay as much as he saves - preferably less, but not more.

    So if you calculate his savings and calculate his costs, then equate them, you get his top price.

    PV can be applied to each item of cost and to each item of saving, using the given discount rate. So if you apply this first, then equate the NPV of costs to the NPV of savings, you get the top price you want.

    His savings are given as a set amount, so you can just calculate the total NPV.
    His costs are all given as multiples (or fractions, if you prefer) of the cost price, so their NPV will be expressed as a multiple of the cost price.

    I get $3883 myself.

    http://www.mathsisfun.com/money/net-present-value.html might help with the maths.
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