There is a choice to buy a car worth $28,000 with 100% financing at 4.99% APR fo

Question

There is a choice to buy a car worth $28,000 with 100% financing at 4.99% APR for 60 month or lease at $450 per month. The car will need maintenance in the 3rd year worth $525 and $825 in the 4th year. The car will have 35% residual value in the 5th year. Sales tax on new car is 6% and required rate of return is 5%.

a) Calculate the Ownership Operating Advantage in year 5.   

Ans: ($939); ($1764); $8861; or ($1464)

b) Calculate the Ownership Operating Advantage in year 4.

Ans: $8861; ($939); ($1764); or ($1464)

c) Which option is better?

Ans: Leasing since IRR is 9.29%; Buying, since IRR is 9.29%; Buying since IRR is 3.65%; Leasing since IRR is 3.65%

Any help would be great. Thank you.

Explanation / Answer

cost of buying car=

purchasing cost= $28,000 at rate of interest 4.99%, and the payment for 60 months

yearly payment with interest is $5880 and for 5 years the payment is $29,400

the maintenance in 3 year is $525 and in 4 year is $825, so the total will be $30,750

and the operating advantage in 5 year is $1764

b. operating advantage in year 4 is $1464

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