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Buy or Lease Decision for a New Car?

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You can buy a car for $25,000 and sell it in 5 years for $5,000. Or you can lease the car for 5 years for $5,000 a year. The discount rate is 12 percent per year.

a. Which option do you prefer?
b. What is the maximum amount you should be willing to pay to lease rather than buy the car?

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Solution Summary

Using NPV calculations, this solution shows the formulas and states an opinion as to whether to lease or buy the new car in an attached Word document.

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Please view the attached Word document for the solution.

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a. Which option do you prefer?

The NPV of cash flows for the buy option would be:

NPV =

= -$22,162.9

The NPV ...

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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