Question

In: Finance

If you lease a $57,000 car with a $700 per month payment and its projected residual...

If you lease a $57,000 car with a $700 per month payment and its projected residual value is $37,000 at the end of the three year leasing period, what is the implied interest rate?

Expert Solution

Calculating the implied interest rate on lease using the IRR technique:

First, we will calculate by taking Implied interest rate(r) as 3%

where, C= Loan AMount = $57000

F = Residual Value = $37000

n= no of period = 3 year*12 =36

r = periodic interest rate = 0.03/12 = 0.0025

Lease Payment = $ 674.12

- Then, we will calculate by taking Implied interest rate(r) as 4%

where, C= Loan AMount = $57000

F = Residual Value = $37000

n= no of period = 3 year*12 =36

r = periodic interest rate = 0.04/12 = 0.0033

Lease Payment = $ 713.84

Now, Calculating Implied Interest rate,

r = 3.65%

So, implied interest rate is 3.65%

jeff jeffy answered 2 days ago

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