Service Contract Savings Calculator
Estimate whether a service contract (extended warranty) saves you money compared to paying for repairs out-of-pocket over the contract period.
Formulas Used
Annual Out-of-Pocket Cost (no contract):
Annual OOP = Repair Frequency × Average Repair Cost
Out-of-Pocket Cost Per Incident (with contract):
OOP per Incident = max(Deductible, Average Repair Cost × (1 − Coverage Rate))
You pay whichever is greater: the deductible or the uncovered portion of the repair.
Annual Cost Under Contract:
Annual Contract Cost = Repair Frequency × OOP per Incident
Present Value of Costs (discounted at opportunity cost rate r over N years):
PV = Σt=1N Annual Cost / (1 + r)t = Annual Cost × [(1 − (1+r)−N) / r]
Total Cost With Contract:
Total = Contract Cost + PV(Annual Contract Costs)
Net Savings:
Net Savings = PV(Out-of-Pocket) − Total Cost With Contract
Break-Even Repair Frequency:
freqBE = Contract Cost / [Annuity Factor × (Avg Repair Cost − OOP per Incident)]
where Annuity Factor = (1 − (1+r)−N) / r
Assumptions & References
- Repair costs are assumed constant and equal to the average repair cost each year.
- Repair frequency is assumed uniform across all years of the contract.
- The discount rate represents the opportunity cost of money (e.g., investment return foregone). A common benchmark is 5–7% (S&P 500 long-run real return).
- The contract cost is paid upfront (time 0) and is not discounted.
- Per-incident out-of-pocket cost = max(deductible, uncovered repair cost), reflecting that the deductible is a floor on what you pay per claim.
- Coverage rate applies to the full repair cost; the deductible is then compared to the uncovered remainder.
- No inflation adjustment is applied to repair costs; for long contracts, actual savings may differ.
- References: Consumer Reports Extended Warranty Analysis; FTC guidance on service contracts (16 CFR Part 700); Insurance mathematics — present value of annuity-due.