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?
Please show all work.© BrainMass Inc. brainmass.com March 4, 2021, 6:23 pm ad1c9bdddf
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 ...
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.