In: Finance
Option 2: Evaluate buying a car vs leasing Purchase a car for $28,988 with a 60 month loan at 3.9% interest rate or lease a car for $259 a month for 39 months. Determine cash flows (include all relevant expenses/costs) List and explain assumptions Compute IRR, NPV, Payback, Discounted Payback to make decision
Soln :
Here the questions seems to be incomplete, we will consider that there is no downpayment and salvage value of car = 0
Option 1 : Buying a Car and paying for 60 months, will make it costly as EMI to pay for the same = 532.55
while in leasing only 259 has to be paid for 39 months, using NPV:
Month | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39 |
Lease | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 | 259 |
discounted value | 258.16 | 257.32 | 256.49 | 255.66 | 254.83 | 254.01 | 253.18 | 252.36 | 251.55 | 250.73 | 249.92 | 249.11 | 248.30 | 247.50 | 246.70 | 245.90 | 245.10 | 244.31 | 243.51 | 242.73 | 241.94 | 241.16 | 240.37 | 239.60 | 238.82 | 238.05 | 237.28 | 236.51 | 235.74 | 234.98 | 234.22 | 233.46 | 232.70 | 231.95 | 231.20 | 230.45 | 229.70 | 228.96 | 228.21 |
NPV | 9472.63 |
Only $9472.63 has to be paid, which is far better than buying the car.
To analyse IRR, Payback option , need more data missing here.