Y6

You are financing the new iphone today (worth $940). It is $100 up-front today and $35 a month every month for the next 2 years (24 months). You are offered insurance for the iphone that charges nothing today but an extra $15 a month. The insurance will cover your expense to fix/replace your phone in the event of serious or moderate accidents.

-The chance of moderate accident in any month is 4% with an average cost of $200.

-The chance of a serious accident in any month is 1% with an average cost of $900.

a. Draw a decision tree. b. Should you purchase insurance or not? c. Using incremental analysis, what is the incremental NPV?