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Lease or Buy? - Time Value for Decision Making

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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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Solution Summary

This question uses present value and future value techniques to make a decision concerning the purchase or lease of an asset.

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MONTHLY PAYMENT ON A LOAN
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?
ANSWER:

PV = $30,000
R = 0.12/12 months per year = 0.01
N = 5 years x 12 months = 60 months
Monthly Payments (P) = [(0.01 x ...

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