After deciding to buy a new car, you can either lease the car or purchase it on

Question

After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $39,500. The dealer has a special leasing arrangement where you pay $108 today and $508 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next three years at an APR of 6 percent. You believe you will be able to sell the car for $27,500 in three years.

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

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

c. What break-even resale price in three 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.)

Explanation / Answer

a)

Cost of purchasing = $39500

b)
(Rate per month = 6%/12 = 0.5%)
(No. of months = 3 years x 12 months = 36 months

Cost of leasing = Present value of lease rentals + Present value of Salvage value

= $108+($508×PVIFA0.5%,36)+($27,500×PVIF0.5%,36)

= $108+($508×32.8710162)+($27,500×0.8356449)

= $39,786.71

c)

Break-even resale price:

= $39,500-[$108+($508×32.8710162)]

= $22,693.52

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.