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 two-year loan. The car you wish to buy costs $30,000. The dealer has a special leasing arrangement where you pay $89 today and $489 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 a 5 percent APR. You believe you will be able to sell the car for $18,000 in two years.

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

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

After deciding to buy a new car, you can either lease the car or purchase it on a two-year loan. The car you wish to buy costs $30,000. The dealer has a special leasing arrangement where you pay $89 today and $489 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 a 5 percent APR. You believe you will be able to sell the car for $18,000 in two years.

Explanation / Answer

After deciding to buy a new car, you can either lease the car or purchase it on a two-year loan. The car you wish to buy costs $30,000. The dealer has a special leasing arrangement where you pay $89 today and $489 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 a 5 percent APR. You believe you will be able to sell the car for $18,000 in two years.

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

Monthly Payment of Loan = pmt(5%/12,24,-30000,0)

Monthly Payment of Loan = $ 1316.14

Break-even resale price in two years = fv(5%/12,24,(1316.1417-489),-89)

Break-even resale price in two years = $ 20,733.99

Answer

  Break-even sale price $   20,733.99

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

PV on buying Car = 30000 - 18000/(1+5%/12)^24

PV on buying Car = $ 13,709.54

Answer

  Present value $ 13,709.54

Note:

NPV on buying Car =( pv(5%/12,24,-489,0) + 89) + 18000/(1+5%/12)^24 - 30000
NPV on buying Car = - $ 2,474.33

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