After deciding you want a new car, you can either lease the car or purchase it w

Question

After deciding you want a new car, you can either lease the car or purchase it with a four-year loan. The car you want costs $35,500. The dealer has a special leasing arrangement where you pay $100 today and $500 per month for the next four years. If you purchase the car, you will pay it off in monthly payments over the next four years at an APR of 7 percent. You believe that you will be able to sell the car for $23,500 in four years.

1. 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).)

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

3.What break-even resale price in four 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).)

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

3.What break-even resale price in four 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).)

Explanation / Answer

1. Present value of purchasing the car:

35,500 -$23,500 xPVIF(0.58%,48)

=35,500 - $23,500 X 0.7576

= $35,500 - $ 17,803.60

= $17,696.40

2. Present value of Leasing the car:

$100 + 500 PVIFA(0.58%,48)

= $100 + 500(41.7926)

=$ 100+20896.3

=$ 20,996.30

3. Break-even resale price in four years would make you indifferent between buying and leasing

$35,500 C PVIF(0.58%,48) = $20,996.30

$35,500 C (0.7576)= $20,996.30

C= $ 19,144.27

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