After deciding to buy a new car, you can either lease the car or purchase it on
ID: 1170271 • Letter: A
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 $28,000. The dealer has a leasing arrangement where you pay $2400 today and $380 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 a 6 percent APR. You believe you will be able to sell the car for $17,000 in three years. Should you buy or lease the car? What break-even resale price in three years would make you indifferent between buying and leasing? 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 $28,000. The dealer has a leasing arrangement where you pay $2400 today and $380 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 a 6 percent APR. You believe you will be able to sell the car for $17,000 in three years. Should you buy or lease the car? What break-even resale price in three years would make you indifferent between buying and leasing? 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 $28,000. The dealer has a leasing arrangement where you pay $2400 today and $380 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 a 6 percent APR. You believe you will be able to sell the car for $17,000 in three years. Should you buy or lease the car? What break-even resale price in three years would make you indifferent between buying and leasing?Explanation / Answer
Present value of car=$28,000
Lease to pay today=$2400
Rent=$380/month, for 3 years
380*3*12=$13680 with interest
Total loan value=13680+2400(principal)
=$16080
Note:If leasing the car, we cannot sell it, therefore no residual value.
Car residual value=$17000
Now, at 6% rate what is the value of 17,000
17000/1.063 (Present value)=$14274
Therefore the value of car today=$28000-$14274
=$13726 is the true value which we are paying considering we are selling the car back at $17000 in the next 3 years.
Breakeven resale price for indifferent between lease and buying
28000=x/1.063+16080
x/1.063=28000-16080
11920*1.1910=$14197
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.