Finance homework problem

timer Asked: Oct 7th, 2015

Question description

Apple introduced iPhone 6s last week. Now you have two options to buy the iPhone from Apple. The first

option allows you to upgrade to a new unlocked iPhone every year with a monthly payment of $32.45. This

option comes with an AppleCare (a damage replacement plan). The second option requires you to pay $649 in

front with a resale value of $450 after one year and $300 after two years. In this case, you need to pay $99 for

the AppleCare that covers for two years. Note that AppleCare is not transferable to a new phone. Suppose you

do not care whether you can have a new phone every year or every two years. Therefore, you have three choices

to own an iPhone: in Choice I, you can use the upgrade program; in Choice II, you can pay in full in front and

purchase the AppleCare and sell your phone in one year to get a new one; and Choice III is similar to Choice II,

except that you will sell your phone in two years instead. Assume that you will continue with the same choice as

before. The appropriate discount rate is 9% APR on a monthly basis.

(a) What is the present value of the total costs for each choice? Can you compare the PVs to make a decision,

and why?

(b) Which choice is the best based on the EAC approach?

(c) Which choice is the best based on the matching approach?

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