Suppose you can buy a new Toyota Corolla for $20,000 and sell it for $12,000 after six years. Alternatively, you can lease the car for $300 per month for three years and return it at the end of the three years. For simplification, assume that lease payments are made yearly instead of monthly – i.e., that they are $3600 per year for each of three years.
a. If the interest rate, r, is 4%, is it better to lease or buy the car?
b. Which is better if the interest rate is 12%?
c. At what interest rate would you be indifferent between buying and leasing the car?