Question
When we are making an investment decision . How do I know the cost of capital given is calculated in APR(annual percentage rate ) or
When we are making an investment decision . How do I know the cost of capital given is calculated in APR(annual percentage rate ) or EAR ( effective annual rate ). Below is the question for reference , the replier directly taking the monthly interest rate as 4%/12=0.333% , i think this method is assumed that the cost of capital is calculated in APR.Why isn't the cost of capital given calculated in EAR and the monthly interest rate should be (1+4%)^(1/12) -1 =0.327% in that case
Question:You are trying to decide between two mobile phone carriers. Carrier A requires you to pay $200 for the phone and 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?
The replier's answer :Monthly perpetual cost of Carrier A=(4%/12)*200/(1-1/(1+4%/12)^24)+60=68.68
Monthly perpetual cost of Carrier B=(4%/12)*100/(1-1/(1+4%/12)^12)+70=78.51
Choose Carrier A
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started