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In: Accounting

You are trying to decide between two mobile phone carriers. Carrier A requires you to pay...

You are trying to decide between two mobile phone carriers. Carrier A requires you to pay $200 for the phone and monthly charges of $60 for 24 months. Carrier B wants you to pay $100 for the phone and monthly charges of $70 for 12 months. Assume you will keep replacing the phone after your contract expires. Your cost of capital is 4%. Based on costs alone, which carrier should you choose?

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Expert Solution

The present value of the costs of carrier A = $ 200 + $ 60 1.041 +  $ 60 1.042 +  $ 60 1.043 +  $ 60 1.044 +  $ 60 1.045 +  $ 60 1.046 +  $ 60 1.047 +  $ 60 1.048 +  $ 60 1.049 +  $ 60 1.0410 +  $ 60 1.0411 +  $ 60 1.0412 +  $ 60 1.0413 +  $ 60 1.0414 +  $ 60 1.0415 +  $ 60 1.0416 +  $ 60 1.0417 +  $ 60 1.0418 +  $ 60 1.0419 +  $ 60 1.0420 +  $ 60 1.0421 +  $ 60 1.0422 +  $ 60 1.0423 +  $ 60 1.0424

The present value of the costs of carrier A = $ 1,114.82

The present value of the costs of carrier B = $ 100 + $ 70 1.041 +  $ 70 1.042 +  $ 70 1.043 +  $ 70 1.044 +  $ 70 1.045 +  $ 70 1.046 +  $ 70 1.047 +  $ 70 1.048 +  $ 70 1.049 +  $ 70 1.0410 +  $ 70 1.0411 +  $ 70 1.0412

The present value of the costs of carrier B = $ 1,513.91

Thus you should choose carrier A because the present value of the costs of carrier A is less than the present value of the costs of carrier B.

ekkarill92 answered 2 years ago
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