Question

Tyler is trying to decide between two mobile phone carriers. Carrier A requires him to pay ?$500 for the phone and monthly charges of ?$70 for 36 months. Carrier B wants him to pay ?$300 for the phone and monthly charges of $80 for 30 months. Assume he will keep replacing the phone after his contract expires. His cost of capital is 55?%. Based on cost? alone, which carrier should he ?choose? What are the equivalent monthly cost for both carrier?

Answer 1

Step: 1 Initial Investment
	Carrier A	Carrier B
Particulars	Amount	Amount
Cost	$                                   500	$                                   300
	500	300
Step : 2 Cashflow
Particulars	36 Months	30 Months
Annual Operaating Cash Flow	70	80
Discounting Factor @ 55%/12 = 4.58%	17.48	16.137
Net Cash out flow	1,224	1,291
Total Outflow (Step 1 & Step 2)	1,724	1,591
Equalized Monthly Cost	48	53
Ans : 1	500	300
Total Outflow for 30 months	1,440	1,590
	1,940	1,890
Advise: Tyler should use Carrier B since it has lower outflow
Ans: 2
Equalized Monthly Cost	48	53