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 $31,000. The dealer has a special leasing arrangement where you pay $91 today and $491 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 $19,000 in three years.

What break-even resale price in three years would make you indifferent between buying and leasing? 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))

Explanation / Answer

If you lease it you'll pay $380 per month for 36 months(3 years) so your total payment is: 380 * 36 + 1 = $13,680 I am going to use the formula for interest compounded monthly to find the amount of your total payment of $28000 for three years with 8% interest if you buy it. P = A(1 + r/n)^(nt) A = 28000 r = 0.08 t = 3 n = 12 P = $35,566.64 Then if you sell it for $15000 your total cost is 35566.64 - 15000 = 20566.64 ************************ Difference between buy and lease is: 20566.64 - 13680 = 6886.64 If you want to break even, your resale price needs to have $6886.64 higher which I doubt you could in real life. No mileage charge accounted if you lease ******************************* If I want to drive a new car every 3 years, then I will choose to lease it

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