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Buy versus Lease

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Buy versus Lease. 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

The solution evaluates a buy versus lease option for a car.

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PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity

a. Which option do you prefer?

Buy:
PVIF (5 periods, 12.% rate=) 0.567426856
Present value of ...

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