You are interested in a new Ford Taurus. After visiting your Ford dealer, doing

Question

You are interested in a new Ford Taurus. After visiting your Ford dealer, doing your
research on the best leases available, you have three options.
a. Purchase the car for cash and receive a Rs-15000 cash rebate from Dealer A. The
price of the car is Rs-150,000.
b. Lease the car from Dealer B. Under this option, you pay the dealer Rs-5,000 now
and Rs-2000 a month for each of the next 36 months (the first Rs-2,000 payment
occurs 1 month from today). After 36 months you may buy the car for Rs-80,000.
Financial Theory Fall-2017 Dr. Muhammad Jamil
Department of Economics and Finance, Pakistan Institute of Development Economics, Islamabad
c. Purchase the car from Dealer C who will lend you the entire purchase price of the car
for a zero interest 36-month loan with monthly payments. The car price is Rs-
150,000. Suppose the market interest rate is 6%.
What is the net cost today of the cheapest option?

Explanation / Answer

Dealer A's net cost is $150,000 minus the $15,000 rebate = 135,000.

Dealer B offers $2000 times 36 months plus the $5000 down payment, plus the $80,000 purchase price at the end of the lease. = PV(6%/12,36,-2000,0)+5000 + PV (6%,2,-80000)= 65742+5000+67169= $137912
Dealer C offers zero interest so the total actual cost is $150,000 but present value is PV(6%/12,36,4166.66) = $136963

So Dealer 1 is the cheapest, which is 135000.

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