New iphone w/ $69.99 plan: ($1,794.34) =PV(5%/12, 24, 69.99) - 199
Old iphone w/ 59.99 plan: ($1,766.41) =PV(5%/12, 24, 59.99) - 399
The new, $199 iphone costs $27.94 more than the $399 old iphone when you consider the monthly plan and time value of money.
That's much better than the previous offering. I was looking at the £35 per month tariff with iPhone v1, but the ~£300 price tag put me off. So now I can get the same tariff and a reduced up-front cost -- what's not to like?
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/...
A bit ott, but hell, why not.
People are carping that the new iphone might be $200 cheaper, but then you have to pay $10 * 24months = $240 more in monthly payments. (Difference of $40 dollars more for the new iphone.)
The math is wrong, you have to discount future payments. I choose 5% as a conservative interest rate.
How is it better to defer payments (add debt) than to pay everything at once? If I pay now, I can bulk up on money quickly later without having it reduced by debt repayment.
Here's a reformulation of the same problem:
If I paid you $200 now, would you pay me $10 a month for 24 months? You have access to a bank which gives you interest of 5% pa compounded yearly.
The answer is no, and the amount that you'd lose out by is $27.94
This doesn't have much to do with the iPhone since we're pricing two different products here, but it's a very important concept to understand in finance.
Inflation, among other things. Deferring payments might add debt, but you've got to include the price of the debt: the interest rate.
Imagine you have $100 in the bank, earning interest. Lets say, if you keep it in your account for a year, you end up with $110. So, if someone gives you the option of paying $100 now, or paying $100 at the end of the year, which do you pick? If you pick now, you'll end up with $0 in your account. If you pick at the end of the year, you'll be left with $10.
Back to your question, normally when you add debt, that debt has interest payments attached to it. So the choice isn't "$100 now or $100 later", but "$100 now or $150 later". Imagine you still have your $100 in the same account, now the choice is to have a balance of $0 now, or -$40 at the end of the year, so it's better to pay now.
Whether you are in the first or the second situation depends on the relative profits from keeping your money invested (ie, via the bank) and the cost of the interest on your debt. For the iPhone, your monthly payments stay the same, so it's more like the first example than the second example, except that the new monthly payments are higher than for the old iPhone, so you still "loose".