management and telecommunications
...) • No other conditions apply (upgrade costs, activation fees, etc.) • Inflation is not accounted for in the calculations • All other assumptions are followed as mentioned in the assignment criteria sheet Results • Plan A, the “Pre-paid plan” is the next best value for money with a present value of $480.44. • Plan B, the “High Spender plan” is the best value for money with a present value of $453.56. With a monthly spending of $15.35 and $20 minimum monthly payments hence leaving $4.65 extra calls possible to be made. • Plan C, the “Low Spender Plan” is the third best value for money with a present value of $490.53. With spending of $21.63 and this amount as monthly payments too. • Plan D, the “B digital – B Everyphone Saver 22” is the worst value for money with a present value of $498.92. With monthly spending of $20.46 and minimum monthly payments of $22. Comparison The four plans can be compared by taking into account the time value of money of all four plans. Because plans B, C and D are all equal monthly payments, it was made possible to simply the calculations (to calculate the present value of each plan) using the present value of an annuity formula. However, with plan A, it was first estimated how often it needs to be recharged. Then it was found that the $65 should last 3.89 months (hence, after 3 months it will need to be recharged), according to the comment stated in the criteria sheet “assume you will recharge the phone for $50 at the beginning of any month when you expect your balance to drop below zero.” This brought the new total to $64.84 which would last the next three months. Thus the pre-paid plan could simply be modelled as a present value of an annuity with $50 payments every three months and an initial payment of $149. All the calculations have been done with each payment being $50. Nevertheless if one only plans to use the phone for the 24 months, then it isn’t necessary to pay the full $50 in the last month as there will be surplus of credit worth $13.72. Even with this small reduction, Plan B calculates to be much cheaper. Time Value of Money and the Reflection upon reality Time value of money is a basic finance concept which allows us to exchange something of value (usually this is money) at different points in time. Money payments are often considered more valuable to people at present than the same amount received in the future. This is due to the amount of interest one can earn over a period. However, future values on present earnings are only promises and contain uncertainty in their occurrence. Hence, different interest rates can be chosen reflecting the risk involved in each alternative. The opportunity cost of lost earnings is the consideration that needs to be addressed – as it is the next best forgone alternative. Consumer behaviour is another important element of time value of money; as impatience, or the preference to consume goods and services at present rather than in a future time may adjust one’s choice. A particular flaw in the present value of an annuity method used for calculating the different values of the phone plans is that it excludes the affects of inflation. ...