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Option 2: Evaluate buying a car vs leasing Purchase a car for $28,988 with a 60...

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

Solutions

Expert Solution

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.

jeff jeffy answered 1 year ago
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