Question

Every year you pay your neighbor $150 to clean the gutters at your house. You are pretty good friends so you know that your neighbor will never increase the price on you. You saw an ad on late night TV for a new product--GutterSnipe--which sits in the gutters and prevents leaves getting in. Your interest rate is 8% and you plan on being in the house another 5 years. You assume that any potential buyer won't be interested/notice that you have installed GutterSnipe on your house. What is the most you would be willing to pay to buy GutterSnipe for your house? $499 $399 $750 $599

Answer 1

$599

Step-by-step explanation:

The maximum willingness to pay for the Gutter Snipe is the present value of annual payment made to the neighbor.

Annual Payment = $150

Time = 5 Years

Rate = 0.08

Present Value of Annuity = P*[1 - (1 + r)^-n / r]

= 150*[1 - (1 + 0.08)^-5 /0.08]

= $599

Therefore, The most you would be willing to pay to buy GutterSnipe for your house is $599.