I want to get a new cell phone from AT&T. They offer me two different deals. Bot

Question

I want to get a new cell phone from AT&T. They offer me two different deals. Both deals include the same level of service and data. 1) Two-year contract: I pay $600 for the phone, $200 in the first month, and $120 for the next 23 months. 2) 24-Monthly payments: I pay nothing for the phone today and $158.84 for the next 24 months.

Banks are currently paying 1% per year for two-tear certificates of deposit so let's use that rate to compare these contracts. Which contract is a financially better deal? At what interest rate are these two deals equivalent? Please SHOW ALL WORK!!!!

Explanation / Answer

1) Sum up all the amount which you need to pay= $600 + $200+ $(120*23)

= $3560.

Amount = P(1+r/100)^n= $ 3560(1+1/100)^ 2= $3631.556

You will earn Interest= $3631.556-$3560= $71.556

2) Amount= $(158.84*24)= 3812.16

Amount = P(1+r/100)^n

=$3812.16(1+1/100)^2= $3888.78

Interest earned=$3888.78-$3812.16= 76.62

In my point of view, go for first one because you have to pay extra in second deal which will amount

$(3812.16- 3560)= $252.16

but, you will be going to earn interest on second ($76.62- $71.56)= $5.07. So, it's better to go for first one.

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