Answer:
The answer is:
We should pick the energy efficient model as its net present value the choice brings about is higher than the standard model.
Explanation:
We apply the net present value (NPV) methodology to evaluate which model to be picked up. The option that resulting in higher NPV should be chosen.
+ The standard model's NPV is equal to its price which is $(1,500) as it has no energy cost-saving during its life time.
+ The energy efficient model's NPV is equal to the sum of its selling price and the net present value of the energy cost-saving for 60 months ( 12 months per year x 5 years of useful life), $45 each month, discounting at opportunity cost of 6%; which is calculated as below:
-1,700 + (45/6%) * [1 - 1.06^(-60)] = $(972.74).
=> So, the energy efficient model should be chosen because its NPV is higher than the standard model ( $(972.74) > $(1,500) ).