A car has a sticker price of

$69,000.

The car has a 100 hp engine and can accelerate from 0 to 60 mph in 15.8 seconds. The lease rate is

4.6%.

The term of the lease is three years. The buyout is

$31,050

at the end of the lease. Assume that the lease has three annual payments with the first payment due on signing.

a) What are the before-tax lease payments assuming no down payment?

b) With leases, sales tax is paid on the lease payments and buyout. If the sales tax rate is

11%,

then what is the present value of the taxes paid on the lease when discounted at the lease rate?

c) If you buy the car for its sticker price, then you will pay sales tax on the purchase price of the car. Which method of purchase generates larger retail tax payments on a present value basis?

A.

A lease generates a larger tax liability than a cash purchase (ignoring rounding error).

B.

A lease generates the same tax liability as a cash purchase (ignoring rounding error).

C.

A cash purchase generates a larger tax liability than a lease (ignoring rounding error).