Car decision. Assume you need a car and you are evaluating lease vs. buy options. The...

Car decision. Assume you need a car and you are evaluating lease vs. buy options. The buying option is with auto loan at interest rate of 3%. The dealer offers you the following. Lease option: $2,000 security deposit, $500 monthly payment for 48 months. Expected end of lease charges are $600. Purchase option: $4,000 down payment, $600 monthly payment for 48 months. At the end the car is estimated to have resale value of $8,000. Do the proper analyses and decide which option is better

Expert Solution

Cost for lease = Total lease payment + Expected end of lease charge + Interest on security deposit

= (500 × 48) + 600 + (2,000 × 0.03 × 4)

= $ 24,840

Cost of buying = Down payment + Total loan payment - Estimated value at the end of loan period + Opportunity cost on down payment

= 4000 + (600 × 48) - 8,000 + (4,000 × 0.03 × 4)

= $ 25,280

Leasing option is better. It has lower cost compared to buying option.

jeff jeffy answered 2 years ago

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