Question

3) You currently own an old smartphone, which you think could be used for at most one additional year. When shopping for new phones, you were told that you could get $100 off the price of a new smartphone by trading in your old phone. If you would plan to keep the new phone for three years, should the $100 be analyzed as a benefit of getting a new phone, or as a cost of keeping the old phone? Explain your reasoning.

Answer 1

In the above situation it can be said that the amount of $100 off while buying new phone will be analysed as a benefit.

Explanation :-

As it can be said that the value we are getting now for the old phone is $100 so we are using $100 from today onwards for the coming 3 years instead of using $100 value for one year as the life of the old phone was one year, now we will have a new phone which will work for 3 years.

PV factor can be considered for calculation of benefit of exchange of old phone for new phone. We are getting $100 today and using this $100 from today onwards. If we would have used old phone then the value of $100 would have been discounted by expected cost of capital and its PV would have reduced.

Indirectly there will be a benefit, while considering the new phone in exchange of getting $100 off for the old phone.