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# Buy vs. Lease: evaluate the options for a \$25000 car; how much would you pay to buy

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You can buy a car for \$25,000.00 and sell it in 5 years for \$5,000.00. Or you can lease the car for 5 years for \$5,000.00 a year. The discount rate is 12% per year.

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

#### Solution Preview

If you buy the car, the cash flow would be something like this:

Year 0 -25,000
Year 1 0
Year 2 0
Year 3 0
Year 4 0
Year 5 5,000

The present value of the purchase is, then,

PV = -25000 + 5000/1.12^5
PV = -22162

If you choose to lease the car, the cash flow will be something ...

#### Solution Summary

The solution displays all the calculation for lease versus buy and then computes the amount of annual payments below which one should lease rather than buy.

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