QUESTION 21 You can lease a car for $7,500 per year for 6 years. Or, you can pur

Question

QUESTION 21

You can lease a car for $7,500 per year for 6 years. Or, you can purchase the car for $45,000 in cash today. If the cost of funds [what you can earn on your money] is 2.63%, is it cheaper to lease or purchase the car?

The PV [lease]= $47,385 > $45,000 to purchase the car; so, purchase the car.

The PV [lease] = $41,132 < $45,000 to purchase the car; so, lease the car.

The sum of lease payments $45,000 = $45,000 to purchase the car, so purchase the car.

The FV[Lease] = $48,065 > $45,000 to purchase the car, so lease the car.

a.

The PV [lease]= $47,385 > $45,000 to purchase the car; so, purchase the car.

b.

The PV [lease] = $41,132 < $45,000 to purchase the car; so, lease the car.

c.

The sum of lease payments $45,000 = $45,000 to purchase the car, so purchase the car.

d.

The FV[Lease] = $48,065 > $45,000 to purchase the car, so lease the car.

Explanation / Answer

Hence, correct option is (b) The PV [lease] = $41,132 < $45,000 to purchase the car; so, lease the car.

Year Cashflows PVF@2.63% Present value 1 7500 0.974 7308 2 7500 0.949 7121 3 7500 0.925 6938 4 7500 0.901 6760 5 7500 0.878 6587 6 7500 0.856 6418 Present value 41132

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