Car Lease

use the information to answer the following questions.

You have decided to acquire a new car that costs $30,000. You are considering whether to lease it for three years or to purchase it and financing the purchase with a three year installment loan. The lease requires no down payment and lasts for three years. Lease payments are $400 monthly starting immediately, whereas the installment loan will require monthly payments starting a month from now at an annual percentage rate (APR) of 8%. The discount rate (APR) is also 8%.

1) If you expect the resale value of the car to be $20,000 three years from now, should you buy or lease it?

2) What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?

3. Car lease, Q1-1.

What is the value of the lease payment?

Hint:

• model the lease payment as an annuity due.
• use Excel PV function to calculate the present value.

(A) 12764.72 (B) 12849.82 (C) 13489.90 (D) 12953.80

4. Car lease, Q1-2

What is the present value of the resale value of $20,000 in three years?

(A) 17549.09 (B) 15745.09 (C) 15769.04 (D) 14759.08

5. Car lease: Q1-3

Following the car installment plan, the car would be brought now at $30000, and sold in three years at 20,000.

Estimate the loss in value as measured by the difference in their present values. This is the net cost of purchasing and reselling the car.

Compare the cost with leasing, should you buy or lease?

(A) Lease (B) buy

6. Care lease, Q2

What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?

(A) 18357 (B) 22987 (C) 19385 (D) 21785