After deciding to get a new car, you can either lease the car or purchase it wit

Question

After deciding to get a new car, you can either lease the car or purchase it with a two-year loan. The car you wish to buy costs $32,000. The dealer has a special leasing arrangement where you pay $93 today and $493 per month for the next two years. If you purchase the car, you will pay it off in monthly payments over the next two years at an APR of 7 percent, compounded monthly. You believe that you will be able to sell the car for $20,000 in two years.
   
What is the cost today of purchasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Cost of purchasing           $  
  
What is the cost today of leasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Cost of leasing           $  

What break-even resale price in two years would make you indifferent between buying and leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Break-even resale price           $

When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost about $5. Based on actuarial tables, “Joltin’ Joe” could expect to live for 20 years after the actress died. Assume that the EAR is 9.9 percent. Also, assume that the price of the flowers will increase at 3.5 percent per year, when expressed as an EAR. Assume that each year has exactly 52 weeks, and Joe began purchasing flowers the week after Marilyn died.

What is the present value of this commitment? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Present value           $

Explanation / Answer

Using calculator,

I=7/12=.583

N=12×2=24

PV=-32000

CPT FV=$32375

Resale price=$20000

PV of net cost =$12375/(1.0722^2)=10762.68.This is the cost today of purchasing the car.

Now, N=2×12=24

I=.583

PMT=-493

CPT PV=-11760

Cost of leasing =$11760+93=$11853

Thank you.

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