4. (b) Buying Versus Leasing You are interested in a $25,000 car. A simplified l

Question

4.

(b) Buying Versus Leasing You are interested in a $25,000 car. A simplified leasing contract includes the following: (i) up-front cost of $3,000,

(ii) $400 monthly lease payment over a 36-month period, and

(iii) purchase cost of $12,000 at the end of the lease. What are the “implied” APR and EAR of the lease?

Should you lease the car or buy and finance the car with a loan from the bank in (a)? <Suggested answer: 8.45%; 8.79%>

Please be thorough in your response and show step by step how you arrived at the 8.45% and 8.79% figures. Also show financial calculator steps if possible. Please respond by 11:00 pm tonight. Thanks.

Explanation / Answer

Solution.

$400 x 36 = $14,400 monthly payments
$14,400 + $3,000 = $17,400 monthly payments + down paymnet
$17,400 + $12,000 = $29,600 total payments + residual value
$29,600 - $25,000 = $4,600 total payments - cost of car = interest paid

So, Ffinancing cost will be $4,600 over 36 months on a $25,000 car.= 11.32% interest rate

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