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 $35,500. The dealer has a special leasing arrangement where you pay $100 today and $500 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. You believe you will be able to sell the car for $23,500 in four years.

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

Explanation / Answer

Present value of both the options:

I would choose to buy car on loan as it is costing me less.

In order to be indifferent among the two alternatives, their respective NPV must be equal, that is (17,775.37). Hence, the PV of the resale price is $17,725 ($35,500 - $17,775)

Break-even resale price:
To calculate break-even resale price use FV formula in excel and enter N = 48; I/Y = 0.005833; PMT = 0; PV = $17,725

Break-even resale price = (23,433.40)

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