Suppose that you can buy a car now for $20,000. On the otherhand, you can...

Suppose that you can buy a car now for $20,000. On the other hand, you can lease it at $350 per month for 60 months. If you buy a car now, then you will be able to sell it at the end of the fifth year for $8,000. If you choose to lease, what is the monthly and annual IRR of the lease compared to the buying a car now?

Solutions

Expert Solution

ANSWER:

GIVEN DATA,

value of car = $20,000

months = 60

lease per month = $350

value of car in future selling period = $8000

monthly and annual IRR =?

here let us calculate Monthly IRR is computed using excel function is mentioned below

Present value =	-8,000
Monthly lease =	350
Future value =	8,000
Number of months =	60

Monthly (nominal) IRR =	4.38%

hence ,

Annual nominal IRR = 4.38% x 12

= 52.56%

as we knowing that the formula for annual effective IRR is

Annual effective IRR = (1 + 0.0438)¹² - 1

= (1.0438)¹² - 1

= 1.6727 - 1

= 0.6727

therefore Annual effective IRR = 67.27%

Rahul Sunny answered 1 year ago

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