You're just completed your PhD and received a tenure track offer from the University of Kentucky. You would now like to buy or lease a $25,000 car. The lease is for 24 months. The financing information is as follows The cost of purchasing the car is $25,000. There is a $250 acquisition fee paid by the lessee at the beginning of the lease. There is a $250 security deposit for the lessee at the beginning of the lease. o This fee is refunded at the end of the lease. The lease promised residual value at the end of 2 years is $10,000. o If the true value is less than this, you must pay the difference. o If the true value is greater than this, you do not receive anything. You believe the value of the car will be worth $12,000 at the end of the lease (i.e., the estimated residual value is $12,000). The monthly lease payments are $600 a month for 24 months. All payments occur at the end of the period. You are considering 2 options: 1) Lease the car. 2) Borrow from a bank that charges an APR of 6% annually, compounded monthly (or .5% monthly).

a. What is the effective monthly interest rate (EMIR) and the effective annual interest rate (EAIR) associated with the lease? b. Based on the answer above, are you better off buying or leasing the car? Explain why. c. Show a data table that shows the EAIR associated with the lease as the estimated residual value changes from $6,000 to $18,000 (in increments of $2000) d. Intuitively explain the pattern documented in the data table. e. Now suppose that the bank charges 1.5 points to borrow from them. In other words, if you borrow $X, you will only receive $X * (1 -0.015), but you will be charged as if you borrowed $X. You may assume that the PV of the loan is $25,000 and the future value of the loan is $0. What is the EMIR and EAIR of the bank loan? f. Compute an amortization table for the bank loan.