Question

In: Finance

You need a new car. You can either lease or buy the car for 355000 SEK....

You need a new car. You can either lease or buy the car for 355000 SEK. In both cases you expect to use the car for 5 years. It will have a residual value of 120000 SEK after 5 years. You can borrow at a rate of 1.5% APR with monthly compounding.

(a) In case you buy the car you will take an annuity loan over 5 year at a borrowing rate of 1.5%. What will be your monthly payments on the loan?

The monthly payments on the loan will be ____________ SEK. (round to SEK, no decimals, no comma as thousand separator)

(b) In case you decide to lease the car from a car dealer, what monthly rate will the dealer charge assuming a perfect market?

The monthly payments on the lease will be _____________ SEK. (round to SEK, no decimals, no comma as thousand separator)

(c) You remember the corporate finance classes at JIBS that you took long time ago and you recognize that a comparison of the rates from (a) and (b) is not meaningful, in particular since in (a) you will own the car and you could sell it at its residual value. Furthermore, you also notice that you can deduct the interest payments on the loan from your income tax so that the after-tax interest rate is 0.7 times the pre-tax rate. The residual value shall be used to make a balloon payment on the remaining loan amount to repay it completely. What will be your monthly payments considering both the balloon loan repayment using the residual amount and also the tax consequences from interest payments?

The monthly payments on the loan will be in this case _____________ SEK. (round to SEK, no decimals, no comma as thousand separator)

Solutions

Expert Solution

(a) The monthly payments on the loan
Pv Amount of loan          355,000
Rate Monthly borrowing rate=(1.5/12)%          0.00125
Nper Number of months of payment                    60 (5*12)
PMT The monthly payments on the loan $6,145.01 (Using PMT function of excel with Rate=0.00125,Nper=60,Pv=-355000)
(b) The monthly payments on lease
Pv Value of the car          355,000
Rate Monthly borrowing rate=(1.5/12)%          0.00125 (Under perfect market)
Nper Number of months of payment                    60 (5*12)
Fv Residual value of the car          120,000
PMT The monthly payments on the lease $4,217.82 (Using PMT function of excel with Rate=0.00125,Nper=60,Pv=-355000,Fv=120000)
.(c) Monthly payments considering both the balloon loan repayment and tax saving
Pv Amount of loan          355,000
A Monthly borrowing rate=(1.5/12)%          0.00125 (Before tax)
Rate=A*0.7 After tax borrowing rate=0.00125*0.7       0.000875
Nper Number of months of payment                    60 (5*12)
Fv Balloon Repayment          120,000
PMT The monthly payments on the loan in this case $4,127.09 (Using PMT function of excel with Rate=0.000875,Nper=60,Pv=-355000, Fv=120000)

jeff jeffy answered 2 years ago
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