Valuing a Lease Contract Friendly Als Auto Leasing Company purchases new and used cars and leases them
Question:
Valuing a Lease Contract Friendly Al’s Auto Leasing Company purchases new and used cars and leases them to customers for periods of one to six years. Al just agreed to lease a used auto to Betty’s Rent-A-Wreck for 25 months with a payment of $425 at the end of each month. The car is expected to be of no value at the end of the lease. Al is able to sell the lease to a local bank that charges an annual interest rate of 24 percent. His only cost in doing so is a $200 processing fee. Because of connections with an auto towing and repainting service, Al was able to acquire the car and deliver it to the lessee at a cost of $6,500.
a. What amount is the bank willing to pay Friendly Al’s Auto Leasing for the lease contract?
b. Has Al made a profit or a loss on the combined transaction? How much?
c. At the end of the first four months, how much interest income will the bank have earned?
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