3 Part Question:

A household is considering to invest on an energy efficienct applicance with the initial capital cost of $8,000. Assume in the next five years, once the new appliance is installed, the annual energy cost will be saved by $2,000 each year. Use discrete discounting for all questions. (i) (5 pts) Based on the cost-benefit framework we discussed in class, should the household invest or not (assume a constant disount rate of 0.10 for the whole period).

(ii)

(iii) If the household decides to invest, what is the implied (range of) discount rate? You may consider using Excel-Solver.

(ii) (5 pts) If we assume the hyerbolic discount rates as in the following table, Year 1 Year 2 Year 3 Year 4 Year 5 0.10 0.08 0.06 0.04 0.02 should the household invest or not