Example:
Evaluation of Investments with Different Lives
You are considering
three different ways of traveling by bus. You can either buy a daily bus
ticket, or two different kind of bus passes that will give you a discount
on a daily ticket; a weekly and a monthly bus pass. Assume you will need
this transportation perpetually, and you use the bus seven times a week
(every day). The appropriate discount rate is 1% per day (assume
there are no taxes or costs). The costs of the various options are
summarized below. In all of this, assume that if you buy a weekly or monthly
pass, you have to buy it one day before you first use it. For example,
if you buy a weekly pass on Sunday, you will use it the following Monday
through Sunday, on which day you buy a new pass for the next week, etc.
| Costs |
Daily Ticket
|
Weekly Pass
|
Monthly Pass
|
|
|
|
(7 days)
|
(30 days)
|
|
|
|
|
| Initial
Cost of Pass |
- -
|
$5.00
|
$25
|
| Ticket Price per
Day |
$2.00
|
$1.20
|
$1.10
|
- Why does the standard
NPV method not work for this 'investment' project?
- Using the EAC
(or, better,using an "Equivalent Daily Cost") method, what option should
you select when traveling by bus?
(Note:
a month is 30 days in this example)
[ Solution
to this Problem ] | [
Return
to Examples Page ]