Your friend is contemplating the acquisition of a 2015 sports car. The negotiated price of the car is $35,000, plus taxes and fees (to be paid when he receives the car). The purchase price includes a full service and maintenance warranty for 4 years or 50,000 miles, whichever is first.

He needs to decide between leasing or purchasing the car. If purchased, he expects that he will keep the car for 4 years, during which he anticipates that he will be driving an average of 12,000 miles per year, then sell the car or trade it in for a new car. For the purchase option, the taxes and fees amount to an additional $3000, payable at time of delivery. Your friend expects to finance this purchase through a 48-month new-car loan offered by the local bank at a 6% simple interest rate. He estimated that he will need to replace the tires at the end of year 3 for a total cost of $800.

The dealer offers a 48-month lease with a 12,000 miles per year allowance. This lease requires a $2,000 initial payment for taxes and fees, plus a $550 monthly payment, with no money due at the end of the lease.

He decided that he can afford to draw a $15,000 down payment from his savings account to reduce his monthly payment for the 48-month loan. His savings account was earning 6% per annum. He attaches no special value to being able to drive a new leased car every 4 years, but cares about the potential additional maintenance that the purchased car will require once the 4- year warranty has expired.

He decided to perform a present value analysis of the total costs of three (3) options to determine which option has the lowest total cost, using an Excel spreadsheet, relying on the functions built into Excel. His analysis involves comparison of three options over a span of 48 months. The three options are:

1) Taking advantage of the Dealers lease offer and signing-up for a 48-months/12,000 miles/year lease;

2) Purchasing the car and selling it 4 years later to a private party at the Kelly Blue Book value of $22,000 (adjusted for inflation);

3) Purchasing the car and selling it 4 years later to the dealer at the Kelly Blue Book trade-in value of $19,000 (adjusted for inflation).

If you were him:

a) Estimate the monthly payment if the car is purchased with a $15,000 down-payment.

b) Estimate the down-payment required to keep the monthly payment at $550 (the same as

the lease monthly payment).

c) Compute the NPV of the payments for each option over the 48-month period.

d) Which option is the least costly?