Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 1,200 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 13,200 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?
A)Plan A.
B)Plan B.
C)Plan C.
D)Plans A and B are equally good.
E)He is best off using none of the plans.

Question

Chillingsworth  has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 1,200 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 13,200 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?
A)Plan A.
B)Plan B.
C)Plan C.
D)Plans A and B are equally good.
E)He is best off using none of the plans.

Quizplus · Accepted Answer

Plan B offers the best cost-benefit ratio. The annual savings from Plan B is $240 (20% of $1,200), and the cost is $1,700. The present value of perpetual savings at a 10% interest rate is $2,400 ($240/0.10), which exceeds the cost of $1,700, making it the best option.

Chillingsworth Has a Neighbor, Shivers, Who Faces the Same