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Evaluating Phone Plans Using the Time Value of Money

A recent article at MSN was "Droid Versus Pre Versus iPhone: A Cost of Ownership Reality Check: Which of these three hot handsets will cost you the most over two years?" By Ian Paul, PC World. (It can be found at the following although it is not needed for this question as the data is listed below.)>1=40000

Using the time value of money concept, compare these three phones using risk free interest rates of 3%, 10% and 25%. Explain the different results resulting from the three interest rates.

iPhone Droid Palm Pre

Cost of Phone with 2-year contract $199.00 $199.99 $146.99
Calling Plan (450 minutes per month) $39.99 $89.98 $69.99
Data Access Fee per month $30.00 $- $-
Unlimited SMS per month $20.00 $- $-
Total Monthly cost $89.99 $89.98 $69.99
Activation Fee--one time cost $36.00 $35.00 $36.00
Early Cancellation Fee $175.00 $175.00 $200.00
Total Two-year Cost $2,394.76 $2,394.51 $1,862.75

Solution Preview

I have computed the net present value of the outlays for each phone at each annual interest rate in the attached Excel 97-2003 spreadsheet. As one would expect, because the initial outlay ...

Solution Summary

Using Excel 97-2003, this solution illustrates how to evaluate different cellular telephone plans using time value of money concepts.