Value of prepayment

[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

 

[Fred Smith]

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.

 

[Ron Rosenfeld]

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.

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