Your car dealer is willing to lease you a new car for $389 a month for 60 months

Question

Your car dealer is willing to lease you a new car for $389 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of the lease?

Your car dealer is willing to lease you a new car for $389 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of the lease?

Explanation / Answer

This is an annuity due problem where the first payment is on the first of each month, and not the last. So we have to use the annuity due formula.

Present value of lease = monthly lease * (1-1/(1+r)^n) * (1+r) / r , where r = monthly interest = 4.9%/12 and n = number of payments = 60

So PV = 389 * (1-1/(1+4.9%/12)^60) * (1+4.9%/12) / (4.9%/12) = 20,747.89

Answer: 20,747.89

Hope this helped ! Let me know in case of any queries.

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