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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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a. Which option do you prefer?

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


= -$22,162.9

The NPV ...

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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Lease or Buy? - Time Value for Decision Making

A. Ted wants to buy a new Volvo. He plans to put $20,000 down and finance $30,000 for 5 years at 12% interest. Ted estimates that he will be able to sell the car at the end of five years for $7,000. What is Ted's monthly payment?

B. After Ted talked to the salesman, he learned that Volvo would lease him the same car at 12% interest, $899 per month, for 5 years without requiring a down payment. Should Ted lease or buy the Volvo?

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