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
 

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)


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