Calculate the NPV of some personal investment decision, such as buying a washing machine instead of using the soap with the hand or replacing an old car with a new one. Ignore the extra convenience of the new asset. Just focus on the
cash costs and benefits.

One of the most expensive kitchen appliances is a refrigerator, but purchasing a new refrigerator is generally a good idea.

Imagine your mother currently owns an old refrigerator, maybe 15-20 years old (refrigerators can last a long time). She never thought of changing it but you will convince her of doing so.

You take your mother to a Walmart (or any other local store) and find a big and shiny refrigerator that costs $1,500.

we can determine the NPV of buying it:

initial outlay = -$1,500

cash flow = savings in electric bill per year. On average, old refrigerators cost about $200 per year in electricity, while modern energy efficient refrigerators cost between $35 per year. Lets say you save $165 per year.

The useful life of the refrigerator will be again 15 years, and you consider that 7% is a good discount rate (more than what you could earn with a CD).  

PV of annual savings = $165 x 9.1079 (PV annuity factor, 7%, 15 periods) = $1,502.80

so the NPV of buying a new refrigerator = -$1,500 + $1,502.80 = $2.80

Since the NPV is positive, you should be able to convince your mother.

the answer is: guns or butter

hope i

-lavira : )