The firm wants a 12% rate of return on any avoidable increments of investment. W

Question

The firm wants a 12% rate of return on any avoidable increments of investment. Which equipment should be purchased? The Financial Advisor is a weekly column in the local newspaper. Assume you must answer the following question. "I need a new car that I will keep for 5 years. I have three options. I can pay $35,945 now. make monthly payments for a 4% 5-year loan with 10000 down, or make lease payment of S550 per month for the next 5 years. The lease option also requires a security deposit of $1500. What should I do?" Assume that the number of miles driven matches the assumptions for the lease, and the vehicle's value after 5 years is S7000. Remember (hat leave payments are made at the beginning of the month, and the salvage value is received only if you own the vehicle. Develop the CFD for each option.

Explanation / Answer

option A -

pay $ 35945

In this option we also think about hte interest if we pay now after five years with interest, it will be more the $ 35945

option B -

monthly payment of 4% of 5 years loan

mean 12x5 = 60 months

and 60 x 4 = 240% means I have to pay near about 2.4 times which is not at all advisable

option c -

$1500 upfront and $550x60 = $33000

Total = $ 34500

which is very very useful.

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