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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