Question

After deciding to get a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $34,500. The dealer has a special leasing arrangement where you pay $1 today and $450 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 an 8 percent APR. You believe that you will be able to sell the car for $27,000 in three years.

1) Should you buy or lease the car?

2) What breakeven resale price in three years would make you indifferent between buying and leasing? (Hint: use Excel Solver.)

Answer 1

solution: monthlly rate = 0.08/12 number of period 3*12 36 Present value of Purchasing car: Purchase cost 34,500.00 Less Present value of resale -FV/(1+r)^n = 27000/(1+(0.08/12))^36 21,255.88 Present value of Purchasing car 13,244.12 Present value of Leasing car: payment today 1.00 add Present value of future monthly payment -450*(1-(1+(0.08/12))^-36)/(0.08/12) 14,360.31 Present value of Leasing car 14,361.31 Buy the car as present value is lower than leasing break even sale price let the resale price be x 34500 -(x/(1+(0.08/12))A36)-14361.31 (x/(1+(0.08/12))^3 6)=345 00 -1 4361.31 (x/(1+(0.08/12))^36)=20138.69 x-(1+(0.08/12))^36)*20138.69 x-25580.91