Apple introduced iPhone XR last year. Now I have two options to buy the iPhone from Apple. The first
allows me to upgrade to a new unlocked iPhone every year with a monthly payment of $32.45. This
option comes with an AppleCare+ (a damage replacement plan). The second option requires me to pay $649
in front with a resale value of $450 after one year and $300 after two years. In this case, I need to pay $99
extra for the AppleCare+ that covers for two years. Note that AppleCare+ is not transferable to a new phone.
If I do not care whether I can have a new phone every year or every two years, I have three choices to
have an iPhone.
Choice I: I can use the upgrade program;
Choice II: I can pay in full in front and purchase the AppleCare+. The next year, I'll sell the old phone and buy a new one;
Choice III: it is similar to Choice II, except that I will sell your old phone in two years and buy a new one. Assume that I will
continue with the same choice going forward. The appropriate discount rate is 9% APR on a monthly basis.
(a) What is the present value of the total costs for each choice? Can I compare the PVs to make a
decision, and why?
(b) Which choice is the best based on the EAC approach?
(c) Which choice is the best based on the matching approach?
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