Question

Please show me how to calculate (a) to (c)

The RTO model for smartphones would work as follwos;

Customers could lease a high-end smartphone such as the Apple iPhone with retail price of $649 for a monthly fee of $30 with a minimum term of 12 months. After the minimum term, customers would have three options:

(1) buy the leased phone for $499 or

(2) continue leasing the phone for 30/ moth or

(3) return the leased phone to BB company.

It was estimated that 25% of customers would buy the phone, 25% would return the phone, and the remaining 50% would keep leasing the phone for an average of 24 months, after which they would return the depreciated price. The new phones would cost BB company an average of $599 to acquire. The depreciated value of the phones that BB company could realize was estimated at $499 ate the end of 12 months and $249 at end of 24 months. Due to the risky nature of the customers who would be attracted to the RTO arrangement, it was estimated that 20% of the phones rented under this arrangement would be lost to defaults. In the case of a default, BB company would need to write off the entire cost of buying the phone. Best Buy estimated that 0.5 million customers would sigh up for the RTO model in the first year, 1 million in the second year, and 2 million in the third year. BB company would apply an annual discount rate of 12% to calculate the NPV of the cash flows from the RTO model.

Rent-to-Own Model
Asssumption	Value
Retail price of phone	649
Cost to acquire fro Best Buy	599
Monthly lease fee	30
Repurchase option after 12 months	499
Depreciated price after 12 months	449
Depreciated price after 24 months	249
% Defaults/lost phones	0.2
% Customers who buy after 12 months	0.25
% Customer who return after 12 months	0.25
% Customer who lease for 24 months	0.5
Expected cash flow	(a)
Less cost of defaults	119.8
Net expected cash flow	(b)
Year 1 Customers	500,000
Year 1 Revenue	(c)

Answer 1

The calculation is presented in table below:

Sl. No.		Year 1	Year 2	Year 3
1	Subscription	500000	1000000	2000000
2	Default @ 20%	100000	200000	400000
3	Remaining genuine active customers (1-3)	400000	800000	1600000
4	No. of Customers leasing for 1 year and returning	100000	200000	400000
5	No. of Customers leasing for 1 year and buying	100000	200000	400000
6	No. of Customers leasing for 2 year and buying after that after paying depreciated value of $249	200000	400000	800000
7	Revenue for current year Rental (Sl. No. 3 * 12 * 30)	144000000	288000000	576000000
8	Revenue for Rentals towards phone rented in previous year i.e. 50% customers who decided to rent for 2 years		72000000	144000000
9	Revenue for depreciated price towards phone rented in previous year i.e. 50% customers who decided to rent for 2 years. This revenue will be received in year 3			49800000
10	Revenue from Customer who decided to buy the phone at $499 after 1 year rental (This revenue will occur in the next year)		49900000	99800000
11	Total Cash Inflow	144000000	409900000	869600000
12	No. of Phones required to be purchased by the firm (It is assumed that the 25% phones which are returned by the customers after 1 year use can be used and given to the subscribers of next year)	500000	900000	1800000
13	Total Cash Outflow (From Purchase of Phones)	299500000	539100000	1078200000
14	Net Cashflow (13-14)	-155500000	-129200000	-208600000

Answer from Questions a to c can be answered from calculation in above table:

a) Expected cash flow:

Sl. No.	Particulars	Year 1	Year 2	Year 3
11	Total Cash Inflow	144000000	409900000	869600000
13	Total Cash Outflow (From Purchase of Phones)	299500000	539100000	1078200000
14	Net Cashflow (13-14)	-155500000	-129200000	-208600000

b) Net Expected Cash Flow:

Sl. No.	Particulars	Year 1	Year 2	Year 3
14	Net Cashflow (13-14)	-155500000	-129200000	-208600000

c) Year 1 Revenue = 144000000