Answer:
Carrier A
Explanation:
In order to decide the carrier on cost alone, we will use the Equivalent Annual Annuity method to calculate the best choice on cost alone. As shown below:
<u>Equivalent Annual Annuity (EAA) - Carrier A</u>
Total Present Value = -$200 + {-$54(PVIFA 0.2917%, 24 Periods)}
Total Present Value = -$200 + {-$54 x 26}
Total Present Value = -$200 + -1,404
Total Present Value = -$1,604
Equivalent Annual Annuity (EAA) = Total Present Value / (PVIFA 0.3333%, 24 Periods)
Equivalent Annual Annuity (EAA) = -$1,604 / 26
Equivalent Annual Annuity (EAA) = -$67
"Equivalent Annual Annuity (EAA) - Carrier A = -$67"
<u>Equivalent Annual Annuity (EAA) - Carrier B</u>
Total Present Value= -$95 + {-$72(PVIFA 0.3333%, 12 Periods)}
Total Present Value = -$95 + -$72 x 13
Total Present Value = -$95 - 936
Total Present Value = -$1,031
Equivalent Annual Annuity (EAA) = Total Present Value / (PVIFA 0.3333%, 12 Periods)
Equivalent Annual Annuity (EAA) = -$1,031 / 13
Equivalent Annual Annuity (EAA) = -$79
"Equivalent Annual Annuity (EAA) - Carrier B = -$79"
The "Carrier-A" should be selected, Since the Equivalent Annual Annuity (EAA) of Carrier-A (-$67) is higher than the Equivalent Annual Annuity (EAA) of Carrier-B (-$79).
<u>Note:</u> All figures in the calculation are rounded off to whole number
