Question

You receive a $25,000 car LEASE at 6% nominal annual for 3 years. Interest is compounded monthly and you make monthly payments. Your Residual value at the end of your lease is $15,000. Assume LEASE payments are made at the END of the month, (first payment due end of first month). You can also get a LOAN for the same terms (although you will pay off the entire car in 3 years).

Assume your MARR for investment is 4% annual (compounded monthly as well).

Compute the PV of your LEASE and LOAN payments and subtract these two values. Enter this difference as a POSITIVE value if the LOAN is better or a NEGATIVE value if the LEASE is better.

For example, if the PV of the LOAN was $12,000 and the PV of the LEASE was $11,500 then the Lease is cheaper so you would enter -500.

This is all of the information given in the problem. Please show work. Thank you.

Answer 1

	LEASE PAYMENT
	Amount of car lease	$25,000
	Residual Value of the car after 3 years	$15,000
	Number of monthly payments	36	(3*12)
	Interest rate per month=(6/12)=	0.50%
	Amount of lease payment per month	$304.22	(Using PMT function of excel with Rate=0.5%,Nper=36, PV=-(25000-15000))
	Payment at the end of lease	$15,000
	MARR=4%
	Monthly minimum acceptable rate of return	(4/12)%
	Present Value(PV) of Lease	$9,164.30	(Using PV function of excel with Rate=(4/12)%, Nper=36, Pmt=-304.22, FV=-15000
	LOAN PAYMENT
	Amount of Loan	$25,000
	Amount of Loan Repayment per month	$760.55	(Using PMT function of excel with Rate=0.5%,Nper=36, PV=-25000)
	MARR=4%
	Monthly minimum acceptable rate of return	(4/12)%
	Present Value(PV) of Loan repayment	$14,144.75	(Using PV function of excel with Rate=(4/12)%, Nper=36, Pmt=-760.55
	Lease Is CHEAPER	($4,980.45)
	Difference	($4,980.45)