Question

You are trying to decide between two mobile phone carriers. Carrier A requires you to pay $ 200 for the phone and then 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?

Answer 1

Answer: Carrier A.

Step-by-step explanation:

It assumed the phone is replaced at the end of contract for both carrier.

For carrier A

Cost of phone is USD200

Monthly subscription for 24months @ USD60/month: USD60×24=USD 1440

INTERPRETATION

The buyer of carrier A would spend $1440 plus $200 for the phone for 2yrs. Total of $1640 for two yrs.

For carrier B

Cost of phone is USD 100

Monthly subscription of USD 70 per month for 12months yield USD 70 × 12 = USD 840

USD 100 plus USD 840 yield $940.

Since the contract is renewable, the buyer of carrier B will spend $1880 for 24months which sum exceed the buyer of carrier A.

Answer 2

I would chose carrier B

Step-by-step explanation:

The reason i will choose carrier B is because if we consider the cost of capital which is 4% of $70, it is lesser than carrier A.

Calculation

If A = $200

Assuming Maintenance = $60 for 24 month

4% of $60 = 2.4

Now considering we keep replacing the phone after the contract expires and cost of capital is 4%

Therefor: 4% of $60 × 24 =57.6

If we run the same calculation for carrier B,

we have, 4% of %70 = 2.8

therefor: 2.8 × 12 = 33.6

Carrier B is therefore cheaper so ill go for it.