TVM, cell phone contract & subsidy Vs. no contract & no subsidy
April 13, 2015 5:39 PM Subscribe
I'm trying to use TVM calculations to determine whether we'd be better off entering a contract and receiving subsidies for new cell phones or if we should go without the contract and pay full price for the phones (which are prorated over 24 months). My question is about how to determine the rate and period for the TVM formulas.
I took a business class in college, so I believe I understand PV, FV, and annuity payment concepts.
I see that I have two annuities (contract payments and no-contract payments) and some up-front costs. I want to convert the two annuities to PV, then add each of those to its corresponding up-front cost (already a PV). Then I can compare the total PV of a contract and the total PV of no contract. (I believe that's the correct thing to do.)
I feel like I should be able to do this, but this has made me realize that I'm not confident doing a real-world, unstructured problem like this. I know that rates (annual and periodic), compounding frequency, number of compounding periods (total and/or per year), and the total number of annuity payments are related. The problem is that I don't understand how to reliably find each value for any given situation.
Here's what I have for this particular problem:
Contract
$120/mo. (beginning at the end of the first month)
24 mo. contract
upfront cost = $640
No contract
$170/mo. (includes the cost of buying the phones, which are prorated over 24 months)
up-front cost = $-300 (I would receive a $300 Costco gift card)
Knowing these things, I'm pretty sure these values go into the TVM calculations:
Contract
Annuity payment = -$120
PV = -$640
Number of payments = 24
No contract
Annuity payment = -$170
PV = $300
Number of payments = 24
My thought was to compound monthly (to match the payment frequency), and use 1.5% annual rate (thinking that would represent inflation).
For the calculations, I have an HP 10bII+ financial calculator, but I've also been looking at web-based calcualtors, like this one: http://www.prenhall.com/divisions/bp/app/cfl/TVM/TVMCalculator.html
If it's not too much trouble, could you tell me how to determine the relationship between rate (annual and periodic), compounding frequency value, number of term/payment values in the TVM formulas for myself in the future. Especially when the compounding period and payment frequency are different. Also, any other gotchas you could help me with would be very appreciated.
Thank you!
I took a business class in college, so I believe I understand PV, FV, and annuity payment concepts.
I see that I have two annuities (contract payments and no-contract payments) and some up-front costs. I want to convert the two annuities to PV, then add each of those to its corresponding up-front cost (already a PV). Then I can compare the total PV of a contract and the total PV of no contract. (I believe that's the correct thing to do.)
I feel like I should be able to do this, but this has made me realize that I'm not confident doing a real-world, unstructured problem like this. I know that rates (annual and periodic), compounding frequency, number of compounding periods (total and/or per year), and the total number of annuity payments are related. The problem is that I don't understand how to reliably find each value for any given situation.
Here's what I have for this particular problem:
Contract
$120/mo. (beginning at the end of the first month)
24 mo. contract
upfront cost = $640
No contract
$170/mo. (includes the cost of buying the phones, which are prorated over 24 months)
up-front cost = $-300 (I would receive a $300 Costco gift card)
Knowing these things, I'm pretty sure these values go into the TVM calculations:
Contract
Annuity payment = -$120
PV = -$640
Number of payments = 24
No contract
Annuity payment = -$170
PV = $300
Number of payments = 24
My thought was to compound monthly (to match the payment frequency), and use 1.5% annual rate (thinking that would represent inflation).
For the calculations, I have an HP 10bII+ financial calculator, but I've also been looking at web-based calcualtors, like this one: http://www.prenhall.com/divisions/bp/app/cfl/TVM/TVMCalculator.html
If it's not too much trouble, could you tell me how to determine the relationship between rate (annual and periodic), compounding frequency value, number of term/payment values in the TVM formulas for myself in the future. Especially when the compounding period and payment frequency are different. Also, any other gotchas you could help me with would be very appreciated.
Thank you!
I'm not sure I understand how, on a technical level, you're going to pay for your phones with an annuity payment over 24 months with a no-contract plan.
In almost every no-contract scenario, you would pay for the full value of the phones upfront - ie, you spend more upfront than with the contract plan - and then pay a far smaller payment each month. I would expect the no contract option to look like a PV of -$400 to -$1400 depending on how fancy your phones are, and then a payment of $35 - $50 per month.
If this is a TVM calculation, that's really important, because the point of the exercise is to see what would happen if you held onto money that could be earning interest over the course of the contract, and whether that would actually net you more money at contract close. (Or maybe my own days as a business analyst are too far behind me. ;)
posted by eschatfische at 6:35 PM on April 13, 2015
In almost every no-contract scenario, you would pay for the full value of the phones upfront - ie, you spend more upfront than with the contract plan - and then pay a far smaller payment each month. I would expect the no contract option to look like a PV of -$400 to -$1400 depending on how fancy your phones are, and then a payment of $35 - $50 per month.
If this is a TVM calculation, that's really important, because the point of the exercise is to see what would happen if you held onto money that could be earning interest over the course of the contract, and whether that would actually net you more money at contract close. (Or maybe my own days as a business analyst are too far behind me. ;)
posted by eschatfische at 6:35 PM on April 13, 2015
Response by poster: Thanks for the feedback. I guess I should explain that these are Verizon offers, through Costco, on two iPhone 6 phones. I'm positive that these are the terms I was given, but I'd rather not get into whether or not these plans are typical or common or even incorrectly stated by me.
If I can learn to determine the TVM values needed for these offers, I could then look at others and see how they would work for us. I appreciate the feedback on the plans, but I'm just trying to learn to use the TVM formulas generally, and then use them specifically on this problem.
I haven't shopped for phones very often, or recently, so I don't know how these offers compare to others, but these are the ones I'm considering for the moment. My question is really more about how to find the TVM values we need for the formulas than it is about asking for advice on whether to enter the contract or not.
posted by atm at 8:01 PM on April 13, 2015
If I can learn to determine the TVM values needed for these offers, I could then look at others and see how they would work for us. I appreciate the feedback on the plans, but I'm just trying to learn to use the TVM formulas generally, and then use them specifically on this problem.
I haven't shopped for phones very often, or recently, so I don't know how these offers compare to others, but these are the ones I'm considering for the moment. My question is really more about how to find the TVM values we need for the formulas than it is about asking for advice on whether to enter the contract or not.
posted by atm at 8:01 PM on April 13, 2015
Response by poster: Also, thanks again to everyone for your help!
posted by atm at 8:07 PM on April 13, 2015
posted by atm at 8:07 PM on April 13, 2015
In almost every no-contract scenario, you would pay for the full value of the phones upfront - ie, you spend more upfront than with the contract plan - and then pay a far smaller payment each month. I would expect the no contract option to look like a PV of -$400 to -$1400 depending on how fancy your phones are, and then a payment of $35 - $50 per month.
The carriers usually have another option, where you have no contract, pay the smaller monthly service charge each month, and they finance the full unsubsidized cost of the phone for you over 1-2 years. Verizon, for instance, calls it Verizon Edge. It turns out customers don't like paying $650+ for a fancy smartphone upfront, so all the majors will finance it for you if you pass their credit check.
posted by zachlipton at 8:31 PM on April 13, 2015
The carriers usually have another option, where you have no contract, pay the smaller monthly service charge each month, and they finance the full unsubsidized cost of the phone for you over 1-2 years. Verizon, for instance, calls it Verizon Edge. It turns out customers don't like paying $650+ for a fancy smartphone upfront, so all the majors will finance it for you if you pass their credit check.
posted by zachlipton at 8:31 PM on April 13, 2015
Have you checked out Ting.com? They run on the sprint network, but they roam (for free) on Verizon...I get really good coverage and my bill averages around $45/mo. Check out swappa.com for phones. You can bring any sprint phone to ting.
FWIW, I find the big carriers all have sucky deals and the small ones (boost, virgin, etc) all have sucky phones. So far this has given me the best of both worlds.
posted by sexyrobot at 9:29 PM on April 13, 2015 [1 favorite]
FWIW, I find the big carriers all have sucky deals and the small ones (boost, virgin, etc) all have sucky phones. So far this has given me the best of both worlds.
posted by sexyrobot at 9:29 PM on April 13, 2015 [1 favorite]
Is there any stipulation in the no-contract plan that future upgrades will require you to turn in your phone? This can affect your FV. (And it's exactly how AT&T "get you" with their "Next" plan.)
posted by bensherman at 11:05 PM on April 13, 2015
posted by bensherman at 11:05 PM on April 13, 2015
And to help with the math, from a hobbyist perspective, you aren't doing pure TMV here because the asset has a service cost which doesn't go towards PV or FV- that is $120 a month. The TMV calculations should be done on the difference between your minimum costs and various plans' subsidies.
posted by bensherman at 11:11 PM on April 13, 2015 [1 favorite]
posted by bensherman at 11:11 PM on April 13, 2015 [1 favorite]
these are Verizon offers
There's a really, really simple rule that always works for evaluating offers from phone companies, and it is this: the offer that would look the most attractive to an innumerate and impulsive teenager is the most expensive option.
You can do the calculations yourself if you like, but they will always come out in accordance with the above rule. This is because the phone companies have already done the calculations, then adjusted their pricing to make the most money they can from the largest segment of their market.
What the rule means, in practice, is that avoiding 24 month contracts with phone companies is almost always an excellent idea.
posted by flabdablet at 4:10 AM on April 14, 2015
There's a really, really simple rule that always works for evaluating offers from phone companies, and it is this: the offer that would look the most attractive to an innumerate and impulsive teenager is the most expensive option.
You can do the calculations yourself if you like, but they will always come out in accordance with the above rule. This is because the phone companies have already done the calculations, then adjusted their pricing to make the most money they can from the largest segment of their market.
What the rule means, in practice, is that avoiding 24 month contracts with phone companies is almost always an excellent idea.
posted by flabdablet at 4:10 AM on April 14, 2015
Also worth considering is that phone companies regularly change their plans, and that competition plus technological improvements often end up meaning that the new plans cost less overall than the old ones. So relying on a straight-up TVM calculation can mislead you by failing to factor in a likely though strictly unquantifiable opportunity cost.
posted by flabdablet at 4:15 AM on April 14, 2015
posted by flabdablet at 4:15 AM on April 14, 2015
I've thought about this overnight, and while I think that trying to use TVM to compare cell phone plans is a very interesting exercise, I just don't think the TVM equations will help you with your goal on deciding which plan is better.
TVM calculations are usually used to determine what course of action results in higher monetary value over time by taking into account compounding. The primary issue here is that there is no substantial amount of compounding, and the compounding does not vary based on course of action, as inflation affects both plans equally. TVM can tell you "if I didn't spend this money and instead put it in a savings plan how much would I have?" or "should I lease at these rates or buy with these rates?", but in terms of paying slightly different service charges over a 24 month period where the effective interest rates are baked into fixed service charges, I just don't think you'll come up with a valuable answer. I do hope that someone better versed with TVM comes in to actually build this, as I'm a little curious as to what they'd do.
It is clear, however, which plan is more expensive with the simple equation NRC + (24 x MRC), of which the "contract" plan yields $3520 in charges, and the so-called "no contract" plan yields $3780 in charges. Assuming that you will use the new phones for 24 months and then replace them, the "contract" plan is the superior plan.
However, I'm going to go back to the fact that the "no contract" plan, if it is in fact Verizon Edge, is also a 2-year contract plan. Edge is just a different 2-year contract plan, which benefits you two particular scenarios:
* If you want to upgrade your phone before the 2 year contract period is up, Verizon Edge has stipulations that allow you to do so, while the traditional 2-year contract does not.
* If you want to use your phone after the 2 year contract plan is up, your rates will go down as you no longer have to pay for Verizon Edge.
So, the question of which plan is better depends entirely on when you intend to replace your phone. Without the details of the specific rates for the Edge plan after two years, or the specific costs of upgrading the phone early in both scenarios, it's not possible to tell which one is cheaper.
And that's how they get ya. They're *both* terrible deals, and given the vagary of phone update cycles, the average person is not going to be able to tell .
Let me also provide what a true no-contract scenario looks like. I'm sorry for being pedantic, but it's important: Verizon Edge, if that's what you're describing as "no-contract", is arguably a far more complex contract than the traditional 2-year subsidy contracts, and your behaviors during the contract term substantially influences costs.
Two no-contract iPhone 6+ phones, unlocked and usable on any carrier, have an NRC of $1500. Whew! But unlimited talk, text and data (with 2.5GB of LTE and slow data after that) for those two iPhone 6+ phones on no-contract carrier Cricket for two people have an MRC of $60/month.
As such, total charges for two people on a true no-contract plan after 24 months are just $2940, substantially less (a savings of $580 to $840) than either of the contract plans you described. Cricket is AT&T, but someone else already mentioned Ting, which is Sprint. T-Mobile offers similar plans, and Verizon No-contract Pre-pay will likely be cheaper as well.
tl;dr: ignore TVM, that no-contract plan is totally a contract plan and value is determined by the specific terms of that contract, check out real no-contract plans which will be cheaper than what you can get at Costco.
posted by eschatfische at 8:50 AM on April 14, 2015
TVM calculations are usually used to determine what course of action results in higher monetary value over time by taking into account compounding. The primary issue here is that there is no substantial amount of compounding, and the compounding does not vary based on course of action, as inflation affects both plans equally. TVM can tell you "if I didn't spend this money and instead put it in a savings plan how much would I have?" or "should I lease at these rates or buy with these rates?", but in terms of paying slightly different service charges over a 24 month period where the effective interest rates are baked into fixed service charges, I just don't think you'll come up with a valuable answer. I do hope that someone better versed with TVM comes in to actually build this, as I'm a little curious as to what they'd do.
It is clear, however, which plan is more expensive with the simple equation NRC + (24 x MRC), of which the "contract" plan yields $3520 in charges, and the so-called "no contract" plan yields $3780 in charges. Assuming that you will use the new phones for 24 months and then replace them, the "contract" plan is the superior plan.
However, I'm going to go back to the fact that the "no contract" plan, if it is in fact Verizon Edge, is also a 2-year contract plan. Edge is just a different 2-year contract plan, which benefits you two particular scenarios:
* If you want to upgrade your phone before the 2 year contract period is up, Verizon Edge has stipulations that allow you to do so, while the traditional 2-year contract does not.
* If you want to use your phone after the 2 year contract plan is up, your rates will go down as you no longer have to pay for Verizon Edge.
So, the question of which plan is better depends entirely on when you intend to replace your phone. Without the details of the specific rates for the Edge plan after two years, or the specific costs of upgrading the phone early in both scenarios, it's not possible to tell which one is cheaper.
And that's how they get ya. They're *both* terrible deals, and given the vagary of phone update cycles, the average person is not going to be able to tell .
Let me also provide what a true no-contract scenario looks like. I'm sorry for being pedantic, but it's important: Verizon Edge, if that's what you're describing as "no-contract", is arguably a far more complex contract than the traditional 2-year subsidy contracts, and your behaviors during the contract term substantially influences costs.
Two no-contract iPhone 6+ phones, unlocked and usable on any carrier, have an NRC of $1500. Whew! But unlimited talk, text and data (with 2.5GB of LTE and slow data after that) for those two iPhone 6+ phones on no-contract carrier Cricket for two people have an MRC of $60/month.
As such, total charges for two people on a true no-contract plan after 24 months are just $2940, substantially less (a savings of $580 to $840) than either of the contract plans you described. Cricket is AT&T, but someone else already mentioned Ting, which is Sprint. T-Mobile offers similar plans, and Verizon No-contract Pre-pay will likely be cheaper as well.
tl;dr: ignore TVM, that no-contract plan is totally a contract plan and value is determined by the specific terms of that contract, check out real no-contract plans which will be cheaper than what you can get at Costco.
posted by eschatfische at 8:50 AM on April 14, 2015
Response by poster: eschatfische,
Thank you for the reply. Your post was the most thoughtful and informative one yet, and I appreciate that. To show my appreciation for your effort and time, I'll respond as well as I can. I guess the best way to reply would be sort of a bullet pointed format.
a) My question was mainly about how to find the values for the TVM formulas. I included the contract/no contract situation in order to give some context, and to put some numbers out there for people to use in their answers.
b) Based on my wife's and my past, I don't expect to replace these phones for at least 2 years. So, I'm planning to choose our next cell phone plans based on this assumption.
c) Because of your answer, I just called Verizon (not Costco, btw). He said Edge is not a contract. It's an offer to prorate the cost of a phone over 24 months. I could leave Verizon at any time. If I left before the phone is paid off, I would owe them the phone and 75% of the phone's price, or I could just pay the balance owed on the phone.
d) I'm looking at Verizon specifically because their coverage is (as far as I can tell) the best. Cricket is AT&T. We want to be on Verizon's network. Less money would be great, but our reason for leaving T-Mobile (after 10 years) is their coverage, so I might as well fix that problem as completely as possible.
e) Verizon pre-paid plans don't offer Edge.
Once again, I truly appreciate everyone's efforts at helping me. I believe they all came from a good place.
Still, the goal of this question was for help with TVM terms, and it appears to be a lost cause now. Oh well, this one didn't go my way. I'm actually surprised no one with TVM knowledge answered. Wrong venue, I guess.
posted by atm at 2:31 PM on April 14, 2015
Thank you for the reply. Your post was the most thoughtful and informative one yet, and I appreciate that. To show my appreciation for your effort and time, I'll respond as well as I can. I guess the best way to reply would be sort of a bullet pointed format.
a) My question was mainly about how to find the values for the TVM formulas. I included the contract/no contract situation in order to give some context, and to put some numbers out there for people to use in their answers.
b) Based on my wife's and my past, I don't expect to replace these phones for at least 2 years. So, I'm planning to choose our next cell phone plans based on this assumption.
c) Because of your answer, I just called Verizon (not Costco, btw). He said Edge is not a contract. It's an offer to prorate the cost of a phone over 24 months. I could leave Verizon at any time. If I left before the phone is paid off, I would owe them the phone and 75% of the phone's price, or I could just pay the balance owed on the phone.
d) I'm looking at Verizon specifically because their coverage is (as far as I can tell) the best. Cricket is AT&T. We want to be on Verizon's network. Less money would be great, but our reason for leaving T-Mobile (after 10 years) is their coverage, so I might as well fix that problem as completely as possible.
e) Verizon pre-paid plans don't offer Edge.
Once again, I truly appreciate everyone's efforts at helping me. I believe they all came from a good place.
Still, the goal of this question was for help with TVM terms, and it appears to be a lost cause now. Oh well, this one didn't go my way. I'm actually surprised no one with TVM knowledge answered. Wrong venue, I guess.
posted by atm at 2:31 PM on April 14, 2015
He said Edge is not a contract.
I hate to pick on this point, but it really bothers me that both Costco and Verizon have said this to you. It's a blatantly dishonest statement. Below are two statements from Verizon's web site that clearly indicate that Verizon Edge is a contract-based plan.
From the Verizon Edge FAQ:
Does the Verizon Edge program require an agreement?
Yes, when you participate in the Verizon Edge program, you will enter a 24-month Verizon Edge Agreement. However, this agreement is different from traditional 2-year service contracts because you can upgrade after 30 days with Edge, provided you have paid for 75% of the device and return your existing device in good working condition. Customers must have and maintain a Verizon Wireless service agreement when they purchase a device under Verizon Edge.
From Verizon Edge: Your Top Questions Answered:
Am I under a service contract with Verizon Edge?
Yes, you’re required to maintain a Verizon Wireless service agreement if you wish to continue to make your monthly Edge device payments.
So, yes, Edge is a contract plan. The "traditional" Verizon contract is for 24 months of Verizon cell phone service that also includes a discount subsidy on a phone. Verizon Edge is a contract for the 24-month purchase of a phone that also includes a requirement you use Verizon cell phone service. I recommend that you read over the specifics of the contract in the Edge FAQ carefully before making a decision.
posted by eschatfische at 4:10 PM on April 14, 2015
I hate to pick on this point, but it really bothers me that both Costco and Verizon have said this to you. It's a blatantly dishonest statement. Below are two statements from Verizon's web site that clearly indicate that Verizon Edge is a contract-based plan.
From the Verizon Edge FAQ:
Does the Verizon Edge program require an agreement?
Yes, when you participate in the Verizon Edge program, you will enter a 24-month Verizon Edge Agreement. However, this agreement is different from traditional 2-year service contracts because you can upgrade after 30 days with Edge, provided you have paid for 75% of the device and return your existing device in good working condition. Customers must have and maintain a Verizon Wireless service agreement when they purchase a device under Verizon Edge.
From Verizon Edge: Your Top Questions Answered:
Am I under a service contract with Verizon Edge?
Yes, you’re required to maintain a Verizon Wireless service agreement if you wish to continue to make your monthly Edge device payments.
So, yes, Edge is a contract plan. The "traditional" Verizon contract is for 24 months of Verizon cell phone service that also includes a discount subsidy on a phone. Verizon Edge is a contract for the 24-month purchase of a phone that also includes a requirement you use Verizon cell phone service. I recommend that you read over the specifics of the contract in the Edge FAQ carefully before making a decision.
posted by eschatfische at 4:10 PM on April 14, 2015
Response by poster: Maybe this is a semantic issue.
I guess technically Edge is a contract, but, it's only a contract to pay off the phone (or pay off 75% and give them back the phone) and keep Verizon until that's done. As I said in (c) above.
Therefore, it's not a typical lock-you-in-for-the-duration "contract". That's what matters in this situation and that's what I was saying.
posted by atm at 4:47 AM on April 15, 2015
I guess technically Edge is a contract, but, it's only a contract to pay off the phone (or pay off 75% and give them back the phone) and keep Verizon until that's done. As I said in (c) above.
Therefore, it's not a typical lock-you-in-for-the-duration "contract". That's what matters in this situation and that's what I was saying.
posted by atm at 4:47 AM on April 15, 2015
it's only a contract to pay off the phone (or pay off 75% and give them back the phone)
If you cancel service to your Edge devices, you're on the hook for the remaining price of the phone at termination. From the Edge FAQ:
If you voluntarily suspend service to your device (with or without billing) you will still receive a monthly statement with your Verizon Edge charges. The charges are due according to the payment schedule included on your Verizon Edge agreement. If you cancel all lines on your account, all remaining Edge balances will be applied to your next monthly statement.
You can upgrade your device after you've paid 75% if you turn it back in and keep Verizon service. If you cancel service, though, you're on the hook for everything. If a rep told you otherwise, they were confused or being dishonest.
Therefore, it's not a typical lock-you-in-for-the-duration "contract".
The penalty for canceling a traditional Verizon contract is an early termination fee of $350 - approximately the discount they gave you when purchasing the phone - during the first seven months of the contract, after which the ETF gradually decreases.
As such, the amount due at an early termination with Edge with an expensive device like the iPhone will often be greater than the amount due at termination with the traditional contract. There can be more lock-in with Edge.
posted by eschatfische at 8:07 AM on April 15, 2015
If you cancel service to your Edge devices, you're on the hook for the remaining price of the phone at termination. From the Edge FAQ:
If you voluntarily suspend service to your device (with or without billing) you will still receive a monthly statement with your Verizon Edge charges. The charges are due according to the payment schedule included on your Verizon Edge agreement. If you cancel all lines on your account, all remaining Edge balances will be applied to your next monthly statement.
You can upgrade your device after you've paid 75% if you turn it back in and keep Verizon service. If you cancel service, though, you're on the hook for everything. If a rep told you otherwise, they were confused or being dishonest.
Therefore, it's not a typical lock-you-in-for-the-duration "contract".
The penalty for canceling a traditional Verizon contract is an early termination fee of $350 - approximately the discount they gave you when purchasing the phone - during the first seven months of the contract, after which the ETF gradually decreases.
As such, the amount due at an early termination with Edge with an expensive device like the iPhone will often be greater than the amount due at termination with the traditional contract. There can be more lock-in with Edge.
posted by eschatfische at 8:07 AM on April 15, 2015
Also, here's the actual Edge contract you'll need to sign at purchase.
posted by eschatfische at 8:22 AM on April 15, 2015
posted by eschatfische at 8:22 AM on April 15, 2015
Response by poster: You are more familiar with the ins-and-outs than I am. Conceded. But if I don't end the Edge contract early, or if I pay off the phone, then it's a non-issue to me.
See, to me, two years is not very long. I haven't been dying to get out of a cell contract for 10+ years. Based on that history, and because of Verizon's coverage and the known monthly cost, I'm not using that possible contingency as much of a basis for my decision. I didn't share this info in my question because it wasn't relevant to to the question.
This was a question about TVM formula setup (see the original question, please), so I didn't share all of my pertinent thoughts and motivations on the subject of being locked into a cell phone contract. For example, I also didn't explicitly state that if I can come out better monetarily, then I wouldn't mind paying full price for the phone 100% up front. (Edge just allows me to prorate that cost, interest free. In fact, considering inflation, it's slightly negative interest.)
So, to me, especially for the purpose of the original question, what happens if I decide to leave the contract early is essentially moot. Mostly because I wouldn't mind paying off the balance on the phone if I needed to.
This was not fun and a waste of both of our time. Thanks for your time and effort and the info, though.
posted by atm at 8:55 AM on April 15, 2015
See, to me, two years is not very long. I haven't been dying to get out of a cell contract for 10+ years. Based on that history, and because of Verizon's coverage and the known monthly cost, I'm not using that possible contingency as much of a basis for my decision. I didn't share this info in my question because it wasn't relevant to to the question.
This was a question about TVM formula setup (see the original question, please), so I didn't share all of my pertinent thoughts and motivations on the subject of being locked into a cell phone contract. For example, I also didn't explicitly state that if I can come out better monetarily, then I wouldn't mind paying full price for the phone 100% up front. (Edge just allows me to prorate that cost, interest free. In fact, considering inflation, it's slightly negative interest.)
So, to me, especially for the purpose of the original question, what happens if I decide to leave the contract early is essentially moot. Mostly because I wouldn't mind paying off the balance on the phone if I needed to.
This was not fun and a waste of both of our time. Thanks for your time and effort and the info, though.
posted by atm at 8:55 AM on April 15, 2015
Best answer: My thought was to compound monthly (to match the payment frequency), and use 1.5% annual rate (thinking that would represent inflation).
The annual rate you should be using is the expected annual return your money would be making if you chose not to spend it right now on a hypothetical entirely-up-front PV-equivalent phone plan, less the inflation rate: in other words, your real return on investment.
If you were going to be super-accurate about this, you'd want to recast all annual rates as monthly rates (to match the compounding period) using the effective interest rate formula. But since your inflation number is always going to be something of a SWAG, this is probably a waste of time; just dividing annual interest rates by 12 is going to be close enough, especially for low percentages and especially for A/B comparisons.
Reality-check your results by running the numbers for a plan with an upfront cost of $240 and monthly payments over two years of $0, and a plan with an upfront cost of $0 and monthly payments over two years of $10. If your funds are currently invested in such a way as to make more than the inflation rate, the upfront plan should end up showing the more expensive PV.
posted by flabdablet at 9:18 PM on April 15, 2015
The annual rate you should be using is the expected annual return your money would be making if you chose not to spend it right now on a hypothetical entirely-up-front PV-equivalent phone plan, less the inflation rate: in other words, your real return on investment.
If you were going to be super-accurate about this, you'd want to recast all annual rates as monthly rates (to match the compounding period) using the effective interest rate formula. But since your inflation number is always going to be something of a SWAG, this is probably a waste of time; just dividing annual interest rates by 12 is going to be close enough, especially for low percentages and especially for A/B comparisons.
Reality-check your results by running the numbers for a plan with an upfront cost of $240 and monthly payments over two years of $0, and a plan with an upfront cost of $0 and monthly payments over two years of $10. If your funds are currently invested in such a way as to make more than the inflation rate, the upfront plan should end up showing the more expensive PV.
posted by flabdablet at 9:18 PM on April 15, 2015
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posted by gryftir at 6:03 PM on April 13, 2015