Value of prepayment

  • Thread starter Thread starter Ron Rosenfeld
  • Start date Start date
R

Ron Rosenfeld

I am trying to figure out the value of prepaying my Internet bill for 1 year in
advance, and I am getting myself confused.

Present fee is $34.95/month
There is planned $5/month increase beginning 9/1.

I can pay one year in advance at the old rate =34.95*12 --> $419.40

Or I can pay monthly fees of $39.95 for the next 12 months.

If I pay the annual fee, I think my cash flow equivalent looks like:

9/1/2008 -$419.40
9/1/2008 $39.95
10/1/2008 $39.95
11/1/2008 $39.95
12/1/2008 $39.95
1/1/2009 $39.95
2/1/2009 $39.95
3/1/2009 $39.95
4/1/2009 $39.95
5/1/2009 $39.95
6/1/2009 $39.95
7/1/2009 $39.95
8/1/2009 $39.95

and XIRR calculates to 35.1% Empirically, that seems too high, for the savings
involved.

I tried using Goal Seek to determine the interest rate for the PV calculation
that would give the cash flow of $39.95*12 a PV of $419.40, and that comes out
to a periodic rate of 2.12%

Suggestions please.

Thanks.
--ron
 
What's wrong with 35.1% return on investment? You're saving over 10% per
month ($5.00 on $34.95), so empircally, you're looking at a pretty decent
return on investment.

2.12% per month works out to 28.63% annually. The difference is with XIRR
you assumed payments at the beginning of the period, and in Goal Seek, you
used payments at the end of the period.

Regards,
Fred.
 
What's wrong with 35.1% return on investment? You're saving over 10% per
month ($5.00 on $34.95), so empircally, you're looking at a pretty decent
return on investment.

2.12% per month works out to 28.63% annually. The difference is with XIRR
you assumed payments at the beginning of the period, and in Goal Seek, you
used payments at the end of the period.

Regards,
Fred.
Click to expand...

I guess nothing's "wrong" with a 35.1% return. I'd love to do so well on my
stocks :-)

It seemed excessive as a value because I'd be paying out $420 now, to save $60
over the course of the coming year. I guess its worth more than 60/420 because
I receive some of the money back sooner rather than having to wait until the
end of the year.

I understand your explanation about beginning versus end of period
calculations.

Thanks.
--ron
 
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