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Calculating Annual Cost

Purchasing a Battery:

An engineering student needs to replace the battery in her car so that she can drive home for a vacation after Spring Semester. She has located the following possibilities:

Battery Warranty Battery Cost

2 years $25

3 years $35

5 years $55

Assume the warranty period represents the life of the battery and that any money not spent on the battery will be left in her bank account which is currently drawing 3.5% interest.

Questions:
1. The equivalent annual cost of the 2 year battery is:
(Express your answer to the nearest 1/10 dollar: XX.X0)

2. The equivalent annual cost of the 3 year battery is:
(Express your answer to the nearest 1/10 dollar: XX.X0)

3. Which battery should she buy?
2 Year
3 Year
5 Year.

Solution Preview

Since money can be invested in the bank of 3.5% interest, this is the opportunity cost and discount rate for computing equivalent annual costs. We assume that equivalent annual costs are paid at the beginning of each year.

1. If ...

Solution Summary

The solution calculates the annual cost. The possibilities of replacing batteries are provided.

$2.19