And you are getting 3G and GPS.

Yes, and if you really would rather have the money eBay is about to become well stocked with alternative, slightly-used iPhones for you at really good values.

For only a 1.6% increase in price.

"The 8GB 3G iPhone will cost just £99 on a new £30 per month tariff and the existing £35 per month tariff. Consumers choosing either the £45 or £75 per month tariffs will get the 8GB 3G iPhone for free."

That's much better than the previous offering. I was looking at the £35 per month tariff with iPhone v1, but the ~£300 price tag put me off. So now I can get the same tariff and a reduced up-front cost -- what's not to like?

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/...

What is the 5%? Why do you not just do $10 * 12 months?

A dollar today is worth more than a dollar tomorrow. (You can buy something else, invest it, etc.) All things being equal, it's better to defer payments rather than all at once.

People are carping that the new iphone might be $200 cheaper, but then you have to pay $10 * 24months = $240 more in monthly payments. (Difference of $40 dollars more for the new iphone.)

The math is wrong, you have to discount future payments. I choose 5% as a conservative interest rate.

I'm sorry, but I still don't get it. This concept is totally strange to me. How is a dollar today worth more than a dollar tommorrow?

How is it better to defer payments (add debt) than to pay everything at once? If I pay now, I can bulk up on money quickly later without having it reduced by debt repayment.

> How is a dollar today worth more than a dollar tomorrow?

Inflation, among other things. Deferring payments might add debt, but you've got to include the price of the debt: the interest rate.

Imagine you have $100 in the bank, earning interest. Lets say, if you keep it in your account for a year, you end up with $110. So, if someone gives you the option of paying $100 now, or paying $100 at the end of the year, which do you pick? If you pick now, you'll end up with $0 in your account. If you pick at the end of the year, you'll be left with $10.

Back to your question, normally when you add debt, that debt has interest payments attached to it. So the choice isn't "$100 now or $100 later", but "$100 now or $150 later". Imagine you still have your $100 in the same account, now the choice is to have a balance of $0 now, or -$40 at the end of the year, so it's better to pay now.

Whether you are in the first or the second situation depends on the relative profits from keeping your money invested (ie, via the bank) and the cost of the interest on your debt. For the iPhone, your monthly payments stay the same, so it's more like the first example than the second example, except that the new monthly payments are higher than for the old iPhone, so you still "loose".

jarnold is talking about a situation without debt, that's why you're confused - debt is effectively the difference between present value and future value. Think of debt as the cost of having something sooner rather than later, and you'll start to understand why we need to use a PV factor to price a future cashflow.

Here's a reformulation of the same problem:

If I paid you $200 now, would you pay me $10 a month for 24 months? You have access to a bank which gives you interest of 5% pa compounded yearly.

The answer is no, and the amount that you'd lose out by is $27.94

This doesn't have much to do with the iPhone since we're pricing two different products here, but it's a very important concept to understand in finance.

He's taking into effect the opportunity cost of spending that dollar verses investing it in something, if I'm not mistaken.

I assume that the taxes on the plan will go up as well.

He's calculating the NPV of the iPhone.

A bit ott, but hell, why not.

http://en.wikipedia.org/wiki/Net_present_value

Shouldn't e be in that formula somewhere?

Don't forget that 16GB is $299.