of money invested. Which one, ifa tives should ach e, if any, of the altena, it
ID: 1105771 • Letter: O
Question
of money invested. Which one, ifa tives should ach e, if any, of the altena, it can obtain 15% annual Dw, or For ue d I be selected? Use a challen rate of return analysis. Cash vs. Loan vs. Lease 8-39 Frequently we read in the newspaper th nd lease a car rather than buying it. F month lease on a car costing $9400, the mo lease charge is about $267. At the end of the 74 months, the car is returned to the lease (which owns the car). As an alternative, the same could be bought with no down payment and 24 equa monthly payments, with interest at a 12% nominal annual percentage rate. At the end of 24 months the car is fully paid for. The car would then be wort about half its original cost. For a typical 24 nd 0 8 (a) Over what range of nominal before-tax interest rates is leasing the preferred alternative? (b) What are some of the reasons that wou leasing more desirable than is indicated in 8-40 The Financial Advisor is a weekly co column in the for 19.99 A local newspaper. Assume you must answer tn lowing question. "T need a new car that I wi 5 years. I have three options. I can (A) pay s 52es will keep $19 now, (B) make monthly nayments for a 60Explanation / Answer
Lease: Pay $267 per month for 24 months.
Purchase:
A = $9,400 (A/P, 1%, 24) = $9,400 (0.0471) = $442.74
Salvage (resale) value = $4,700
(a) Purchase Rather than Lease
Monthly payment = $442.71 - $267 = $175.74
Salvage value = $4,700 - $0 = $4,700
Rate of Return
PW of Cost = PW of Benefit
$175.74 (P/A, i%, 24) = $4,700
(P/A, i%, 24) = $4,700/$175.74 = 26.74
i = 0.93% per month
Thus, the additional monthly payment of $175.74 would yield an 11.2% rate of return. Leasing is therefore preferred at all interest rates above 11.2%.
(b) Items that might make leasing more desirable:
1. One does not have, or does not want to spend, the additional $175.74 per month.
2. One can make more than 11.2% rate of return in other investment.
3. One does not have to be concerned about the resale value of the car at the end of two years.
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