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    Buy versus Lease: Calculate the best option and compute the

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    Buy versus Lease. You can buy a car for $30,000 and sell it in 5 years for $4,500. Or you can lease the car for 5 years for $7,000 a year. The discount rate is 7.5 percent per year.

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

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    Solution Preview

    Buy versus Lease. You can buy a car for $30,000 and sell it in 5 years for $4,500. Or you can lease the car for 5 years for $7,000 a year. The discount rate is 7.5 percent per year.

    a. Which option do you prefer?

    You need to find the present value for the cash outflow for each option.

    Buy decision

    Find the present value for $4,500 to be received in 5 years.

    PV = 4,500/(1 + 0.075)5 = $3,134.51

    $3,134.51 is ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer which option do you prefer and what is the maximum annual payment amount you should be willing to pay to lease rather than buy the car.

    $2.49

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