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 cost alone, which carrier should you choose?

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Business

Quintin

29 May, 14:22

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 cost alone, which carrier should you choose?

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Madeleine Peterson · Answer 1

Choose Carrier A

Explanation:

Monthly perpetual cost of Carrier A = (4%/12) * 200 / (1-1 / (1+4%/12) ^24) + 60=68.68

Monthly perpetual cost of Carrier B = (4%/12) * 100 / (1-1 / (1+4%/12) ^12) + 70=78.51

therefore it is better to Choose Carrier A