After deciding to buy a new car, you can either lease the car or purchase it on

Question

After deciding to buy a new car, you can either lease the car or purchase it on a four-year loan. The car you wish to buy costs $33,500. The dealer has a special leasing arrangement where you pay $96 today and $496 per month for the next four years. If you purchase the car, you will pay it off in monthly payments over the next four years at a 7 percent APR, compounding monthly. You believe you will be able to sell the car for $21,500 in four years.

What is the cost of purchasing the car today?

What is the cost of leasing the car today?

What break-even resale price on four years would make you indifferent between buying and selling?

Explanation / Answer

1) Cost of Purchasing = $33500 - PV (7%/12, 4*12,0-$21500) = $17237.43

2) Cost of Leasing = $96 + PV(7%/12,4*12,-496,0,0) = $20809.06

PV of Resale Price = $33500 - 20809.06 = $12690.94

3) Future Value of Resale Price = FV(7%/12,4*12,0,-12690.94,0) = $16778.11

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