I blogged a few weeks ago about how our washer has been giving me fits. When I did my analysis back then, it turned out that I would be better off fixing my current washer than buying a new one. This was because the one I wanted was $989.99 and it would cost only $415 to fix the one I have. Yes, I know that is a REALLY expensive washer and no, it doesn’t come with a person to actually load it and unload it. However, it’s one of those new-fangled steam washers that is purported to be really good for people with allergies. Since my youngest baby seems to be allergic to absolutely everything, it makes sense to me to splurge for that one. Because the new one would give me $100 back in incentive money for energy efficiency, would be more energy efficient and should last about 11 years, it was a close race. My current one should have only about five years of life left (at best) and takes 2.5 times more energy to run but was still the better deal.
How to Do the Math
This boiled down to a classic replacement analysis problem that is common in corporate finance. The only trick is that the two alternatives that I was comparing did not have the same life – the new machine should last 11 years while the old machine only has five years left. To overcome this issue, I calculated what each machine would cost me annually over their respective remaining lives. My decision rule, then, is to simply choose the machine that costs the least each year. This is called the equivalent annual annuity method.
The present value of this annuity was the $513.56 that I estimated that this machine would cost me over the next five years in repair and energy costs. Assuming a 10% interest rate over five years, that was the same as $135.48 per year.
The present value of the annuity representing the new machine was $954.94. Again assuming a 10% interest rate over five years, this machine would cost me $147.03 per year. It was close, but by my calculations, that washer had to come down to under $845 before it was a better deal than repairing my old one.
Hooray for Sales
Now, it turns out that the washer I want is on sale for the holidays and I would be MUCH better off buying new than spending more money repairing my old one. At a sale price of $599, it turns out that my cost of ownership will be just $97.62 per year. On top of that, several stores are offering 18 – 24 months of interest-free financing. The time value of money tells me that that makes this deal even sweeter! I can sock my $599 away and let it earn interest and still get a new washer today. We’ve got to learn what big business already knows — leverage is good if your cost of capital is low and it doesn’t get any lower than 0%!
What I Learned
Besides the power of leverage, the other thing that I learned from this experience is that once you know what you want, it pays to comparison shop and not run out and buy the first thing you see. There are also lists that tell you in which months you can get the best deals on certain purchases. Most folks say September and October are best for appliances, but apparently November is pretty good too! It is amazing how doing your homework and being patient can save you a lot of money!