Leasing a car vs. buying a car
Not what you're looking for?
You want to buy a new car, but you're not sure whether you should lease it or buy it. You can buy it for $50,000, and you expect that it will be worth $20,000 after you use it for 3 years. Alternatively, you could lease it for payments of $650 per month for the 3-year term, with the first payment due immediately. The lease company did not tell you what interest rate they're using to calculate the monthly payments, but you know you could borrow money from your banker at an annual percentage rate (APR) of 8%.
a) Calculate the present value of the lease payments, assuming monthly compounding at the given APR of 8%.
b) Calculate the present value of the $20,000 salvage value, again using monthly compounding and the given APR of 8%. Which option do you prefer, lease or buy?
c) Calculate the amount of the salvage value which would make you indifferent between leasing and buying.
d) If you were able to use this car 100% for business, rendering the lease payments tax-deductible, or alternatively, allowing you to deduct depreciation using straight-line depreciation (depreciated to expected salvage value) and assuming your tax rate is 40%, would you prefer to buy or lease the car?
Purchase this Solution
Solution Summary
The solution compares the cost of leasing a car vs buying a car.
Solution Preview
Leasing a car vs. buying a car
You want to buy a new car, but you're not sure whether you should lease it or buy it. You can buy it for $50,000, and you expect that it will be worth $20,000 after you use it for 3 years. Alternatively, you could lease it for payments of $650 per month for the 3-year term, with the first payment due immediately. The lease company did not tell you what interest rate they're using to calculate the monthly payments, but you know you could borrow money from your banker at an annual percentage rate (APR) of 8%.
a) Calculate the present value of the lease payments, assuming monthly compounding at the given APR of 8%.
We calculate Present Value factor for Annuity due - PVIFA (Annuity due) or read it from financial tables
PVIFA- Annuity due( n, r%)= =(1+r%) x[1-1/(1+r%)^n]/r%
We are calculating annuity due because the first lease payment is due immediately
PVIFA
Annuity: Due
Frequency= M Monthly
No of years= 3
No of Periods= 36 =3x ...
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Learning Lean
This quiz will help you understand the basic concepts of Lean.