Graphical Solutions for mutually exclusive alternatives. The financial Advisor i

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Graphical Solutions for mutually exclusive alternatives. The financial Advisor is a weekly column in the local newspaper. Assume you must answer the following question. "I need a new car that will keep for 5 years. I have three options. I can (A0 pay $35,945 now, (B) make monthly payments for a 4% 5-year loan with 10000 down. or (C) make lease payment of $550 per month for the next 5b 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 $7000. Remember that lease payments are made at the begining of the month, and the salvage value is received only if you own the vehicle. DEvelop the CFD for each option. Develop a choice table for nominal interest rates form 0% to 50%(You do not know what the reader's interest rate (the first column in the table isn APR, not monthly rate, do the conversion by yourself!) If MARR = 9% which option should you go with

Explanation / Answer

Option-1 Paying $35945 now. Option-2 Making monthly payments at 4% pa interest rate for 5 years and making a down payment of $10000 Therefore, Interest = 4% per annum Car Cost = $35,945 Down payment = $10,000 Actual Loan = $25,945 Number of periods = 5 years Therefore, Monthly installments = $477.82 Also salvage value $7000 of car today = PV of $7000 discounted for 5 years at 4% per annum = $5,753.49 So, total value of the loan today = $35945 - $5753.49 = $30,191.51 Option-3 It is an leasing option in which lease rental are paid Lease rentals = $550 per month Number of periods = 5 years or 60 months interest rate = 4% per annum Therefore, Present value of lease rentals = $29,964.04 Also the money deposited as security = $1,500 Therefore total value of Lease option = $29964.04 + $1500 = $31,464.04 So the purchase option which is option-2 is better. Answer-b Choice table: Option Rate of interest A B C 0% $35,945 $28,945.00 $34,500 5% $35,945 $30,460.32 $30,766 10% $35,945 $31,598.55 $27,602 15% $35,945 $32,464.76 $24,908 20% $35,945 $33,131.86 $22,606 25% $35,945 $33,651.24 $20,629 30% $35,945 $34,059.70 $18,925 35% $35,945 $34,383.91 $17,449 40% $35,945 $34,643.46 $16,166 45% $35,945 $34,852.91 $15,045 50% $35,945 $35,023.19 $14,063

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