Question

In: Finance

Car Lease use the information to answer the following questions. You have decided to acquire a...

Car Lease

use the information to answer the following questions.

You have decided to acquire a new car that costs $30,000. You are considering whether to lease it for three years or to purchase it and financing the purchase with a three year installment loan. The lease requires no down payment and lasts for three years. Lease payments are $400 monthly starting immediately, whereas the installment loan will require monthly payments starting a month from now at an annual percentage rate (APR) of 8%. The discount rate (APR) is also 8%.

1) If you expect the resale value of the car to be $20,000 three years from now, should you buy or lease it?

2) What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?

3. Car lease, Q1-1.

What is the value of the lease payment?

Hint:

  • model the lease payment as an annuity due.
  • use Excel PV function to calculate the present value.

(A) 12764.72 (B) 12849.82 (C) 13489.90 (D) 12953.80

4. Car lease, Q1-2

What is the present value of the resale value of $20,000 in three years?

(A) 17549.09 (B) 15745.09 (C) 15769.04 (D) 14759.08

5. Car lease: Q1-3

Following the car installment plan, the car would be brought now at $30000, and sold in three years at 20,000.

Estimate the loss in value as measured by the difference in their present values. This is the net cost of purchasing and reselling the car.

Compare the cost with leasing, should you buy or lease?

(A) Lease (B) buy

6. Care lease, Q2

What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?

(A) 18357 (B) 22987 (C) 19385 (D) 21785

Solutions

Expert Solution

Q1-1]

Value of the lease payment is calculated using PV function :

rate = 8% / 12 (converting annual rate into monthly rate)

nper = 3 * 12 (3 years with 12 monthly payments each year)

pmt = -400 (Monthly payment. This is entered with a negative sign because it is a cash outflow)

fv = 0 (There is no cash inflow at the end of lease period)

type = 1 (first payment is made immediately. It is an annuity due)

PV is calculated to be $12,849.82.

Q1-2]

Present value = future value / (1 + periodic interest rate)number of periods

Here, the periodic rate is the monthly rate, which is 8%/12

number of periods = number of years * 12 = 3 * 12 = 36.

Present value = $20,000 / (1 + (8%/12))36

Present value = $15,745.09.

Q1-3]

Loss in value = purchase price - present value of the resale value

Loss in value = $30,000 - $15,745.09

Loss in value = $14,254.91.

Q1-4]

For you to be indifferent, the loss in value should equal the present value of lease payments.

Let us say the resale price is X. Then :

$30,000 - (X / (1 + (8%/12))36) =  $12,849.82

X = ($30,000 - $12,849.82) * (1 + (8%/12))36

X = $21,785


Related Solutions

Imagine that you have decided to acquire your dream car.  You now have to decide whether to...
Imagine that you have decided to acquire your dream car.  You now have to decide whether to buy or lease that car. Write a report specifying the differences between leasing and buying your dream car and make a decision on whether to buy or lease. In writing your report you must do the following: Gather the terms under which you would lease the car, such as the necessary down payment amount and monthly payment amount. Calculate the total costs when leasing...
3. Use the following information to answer the questions below. The equipment of lease has 5-year...
3. Use the following information to answer the questions below. The equipment of lease has 5-year service life with no salvage value. The lease term is 5 years, requiring equal payment of $11,990.81 at the beginning of year. The annual $11,990.81 rental payment includes $1,000 insurance and property taxes per year. The lessee depreciates similar equipment on a straight-line basis. The discount rate is 10%. Determine whether the lease is capital lease or operating lease, and why. Using the appropriate...
Assume the BLS decided it was time for you to analyze a broader perspective of the economy. Use the following information to answer the questions below.
Critical Thinking:  Assume the BLS decided it was time for you to analyze a broader perspective of the economy.  Use the following information to answer the questions below.  Your assigned economy has a population of 202 million.  Within that population, there are 172 million adults and 30 million children under the age of 16.  Some of the adults are in prison (2 million) and some are serving full time in the military (5 million) and the rest are currently all capable of working.   There are...
Required information Use the following information to answer questions [The following information applies to the questions...
Required information Use the following information to answer questions [The following information applies to the questions displayed below.] The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system. April 30 May 31 Inventories Raw materials $ 31,000 $ 30,000 Work in process 9,500 18,200 Finished goods 54,000 34,000 Activities and information for May Raw materials purchases (paid with cash) 197,000 Factory payroll (paid with cash) 200,000 Factory overhead Indirect materials...
Use the following information to answer the questions below:
Use the following information to answer the questions below: note: all sales are credit sales Income Stmt info: 2016 2017 Sales $ 975,000 $        1,072,500 less Cost of Goods Sold: 325,000 346,125 Gross Profit 650,000 726,375 Operating Expenses 575,000 609,500 Earnings before Interest & Taxes 75,000 116,875 Interest exp 25,000 31,000 earnings before Taxes 50,000 85,875 Taxes 20,000 34,350 Net Income $ 30,000 $              51,525 Balance Sheet info: 12/31/2016 12/31/2017 Cash 60,000 $ 63,600 Accounts Receivable 80,000 $ 84,000 Inventory...
Use the following information to answer questions [The following information applies to the questions displayed below.]...
Use the following information to answer questions [The following information applies to the questions displayed below.] The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system. April 30 May 31 Inventories Raw materials $ 48,000 $ 48,000 Work in process 9,900 19,700 Finished goods 67,000 33,700 Activities and information for May Raw materials purchases (paid with cash) 194,000 Factory payroll (paid with cash) 150,000 Factory overhead Indirect materials 14,000 Indirect...
Use the following information to answer questions [The following information applies to the questions displayed below.]...
Use the following information to answer questions [The following information applies to the questions displayed below.] The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system. April 30 May 31 Inventories Raw materials $ 44,000 $ 54,000 Work in process 9,500 18,800 Finished goods 59,000 34,000 Activities and information for May Raw materials purchases (paid with cash) 185,000 Factory payroll (paid with cash) 250,000 Factory overhead Indirect materials 10,000 Indirect...
Use the following information to answer questions 1-4. You have achieved a dream job working for...
Use the following information to answer questions 1-4. You have achieved a dream job working for the Toledo Mud Hens. You estimate the demand for general admission tickets as follows. Price Quantity 15 5000 14 6000 13 7000 12 8000 11 9000 10 10000 The marginal cost of selling a ticket is $2. Other fixed costs per game equal $5000. Finally, the seating capacity is 9000. Question 1 (0.5 points) What is the profit maximizing price? Question 1 options: 15...
You are considering whether to buy or lease a car. If you lease, you have to...
You are considering whether to buy or lease a car. If you lease, you have to pay a refundable security deposit of $5 hundred, and a monthly lease payment of $424 for 3 years, with payments due at the beginning of the month. If you buy, you will pay a downpayment of $21 hundred, and a monthly loan payment of $565, over the same period of time, with payments due at the end of the month. The car is estimated...
You are planning to acquire an asset for use in your business. Should you lease or...
You are planning to acquire an asset for use in your business. Should you lease or purchase the asset? What do you feel the differences are between the two options. You may find it helpful to look outside the textbook for information on this. Try to keep it simple but try to describe some advantages and disadvantages to both options.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT