Ford Motor Co. has asked you to develop lease terms for the Mustang car line which has an average customer selling price (new) of 28,000$. Leasing is attractive because it assists consumers in obtaining new vehicles with a small down payment and "smallish" monthly payments. Marketing analysts have recommended that the optimal lease terms would be an initial down payment of less than $1000, monthly payments of no more than $500 and lease terms of three years. When the lease expires, Ford will sell the used Mustangs in the resale market. Although resale market prices fluctuate, Ford has gathered information on past resale prices.

Age of Car at Resale Price at resale

1 year $23000

2 years $21500

3 years $19000

4 years $16500

5 years $14000

Ford's cost of capital is 18 percent per year (1.5% per month)

A. Develop a competitive and profitable leasing program. Assume a $1000 down payment. Calculate monthly payments for 3 and 5 year leases. Assume the down payment and the first lease payment is made immediately and that all subsequent lease payments are made at the start of the month. (remember that the monthly rate is the annual rate divided by 12).

B. Reevaluate the lease programs assuming a down payment of $ 2000.

C. Reevaluate the lease programs assuming a down payment of 1000 and an increase in residual value estimates of $1000.

D. What is your final recommendation? What risks are associated with your recommendation.