Ford Motor Co. has asked you to develop lease terms for the Mustang car line which...

Ford Motor Co. has asked you to develop lease terms for the Mustang car line which has an average customer selling price (new) of 28,000$. Leasing is attractive because it assists consumers in obtaining new vehicles with a small down payment and “smallish” monthly payments. Marketing analysts have recommended that the optimal lease terms would be an initial down payment of less than $1000, monthly payments of no more than $500 and lease terms of three years. When the lease expires, Ford will sell the used Mustangs in the resale market. Although resale market prices fluctuate, Ford has gathered information on past resale prices.

Age of Car at Resale Price at resale

1 year $23000

2 years $21500

3 years $19000

4 years $16500

5 years $14000

Ford’s cost of capital is 18 percent per year (1.5% per month)

A. Develop a competitive and profitable leasing program. Assume a $1000 down payment. Calculate monthly payments for 3 and 5 year leases. Assume the down payment and the first lease payment is made immediately and that all subsequent lease payments are made at the start of the month. (remember that the monthly rate is the annual rate divided by 12).

B. Reevaluate the lease programs assuming a down payment of $ 2000.

C. Reevaluate the lease programs assuming a down payment of 1000 and an increase in residual value estimates of $1000.

D. What is your final recommendation? What risks are associated with your recommendation.

Expert Solution

ANSWER A
				FOR 3 YEARS					FOR 5 YEARS
	MONTHS	Leasepayment	PV Factor	Presnt value		MONTHS	Leasepayment	PV Factor	Presnt value
	0	1750	1	1750		0	1450	1	1450
	1	750	0.9852	738.90		1	450	0.9852	443.34
	2	750	0.9706	727.95		2	450	0.9706	436.77
	3	750	0.9563	717.23		3	450	0.9563	430.335
	4	750	0.9422	706.65		4	450	0.9422	423.99
	5	750	0.9282	696.15		5	450	0.9282	417.69
	6	750	0.9145	685.88		6	450	0.9145	411.525
	7	750	0.9010	675.75		7	450	0.9010	405.45
	8	750	0.8877	665.78		8	450	0.8877	399.465
	9	750	0.8745	655.88		9	450	0.8745	393.525
	10	750	0.8616	646.20		10	450	0.8616	387.72
	11	750	0.8489	636.68		11	450	0.8489	382.005
	12	750	0.8364	627.30		12	450	0.8364	376.38
	13	750	0.8240	618.00		13	450	0.8240	370.8
	14	750	0.8118	608.85		14	450	0.8118	365.31
	15	750	0.7998	599.85		15	450	0.7998	359.91
	16	750	0.788	591.00		16	450	0.788	354.6
	17	750	0.7763	582.23		17	450	0.7763	349.335
	18	750	0.7649	573.68		18	450	0.7649	344.205
	19	750	0.7536	565.20		19	450	0.7536	339.12
	20	750	0.7425	556.88		20	450	0.7425	334.125
	21	750	0.7315	548.63		21	450	0.7315	329.175
	22	750	0.7207	540.53		22	450	0.7207	324.315
	23	750	0.7101	532.58		23	450	0.7101	319.545
	24	750	0.6995	524.63		24	450	0.6995	314.775
	25	750	0.6892	516.90		25	450	0.6892	310.14
	26	750	0.679	509.25		26	450	0.679	305.55
	27	750	0.6689	501.68		27	450	0.6689	301.005
	28	750	0.6591	494.33		28	450	0.6591	296.595
	29	750	0.6493	486.98		29	450	0.6493	292.185
	30	750	0.6397	479.78		30	450	0.6397	287.865
	31	750	0.6303	472.73		31	450	0.6303	283.635
	32	750	0.621	465.75		32	450	0.621	279.45
	33	750	0.6118	458.85		33	450	0.6118	275.31
	34	750	0.6027	452.03		34	450	0.6027	271.215
	35	750	0.5938	445.35		35	450	0.5938	267.21
		28000		22055.95		36	450	0.5851	263.295
	AT THE END OF 3rd year			37	450	0.5764	259.38
			PV OF RESALE PRICE(19000*1.643)	31217		38	450	0.5679	255.555
			Profit	9161.05		39	450	0.5595	251.775
						40	450	0.5512	248.04
						41	450	0.5431	244.395
						42	450	0.5351	240.795
						43	450	0.5272	237.24
						44	450	0.5194	233.73
						45	450	0.5117	230.265
						46	450	0.5042	226.89
						47	450	0.4967	223.515
						48	450	0.4893	220.185
						49	450	0.4821	216.945
						50	450	0.475	213.75
						51	450	0.4679	210.555
						52	450	0.4611	207.495
						53	450	0.4543	204.435
						54	450	0.4475	201.375
						55	450	0.4409	198.405
						56	450	0.4344	195.48
						57	450	0.4279	192.555
						58	450	0.4217	189.765
						59	450	0.4154	186.93
							28000		18986.32

						AT THE END OF 5th year
								PV OF RESALE PRICE(14000*2.2877)	32027.8
								Profit	13041.5





ANSWER B		26000	722.2222222				26000	433.3333


				FOR 3 YEARS					FOR 5 YEARS
	MONTHS	Leasepayment	PV Factor	Presnt value		MONTHS	Leasepayment	PV Factor	Presnt value
	0	2722.22	1	1750		0	2433.33	1	1450
	1	722.22	0.9852	711.53		1	433.33	0.9852	426.9167
	2	722.22	0.9706	700.99		2	433.33	0.9706	420.5901
	3	722.22	0.9563	690.66		3	433.33	0.9563	414.3935
	4	722.22	0.9422	680.48		4	433.33	0.9422	408.2835
	5	722.22	0.9282	670.36		5	433.33	0.9282	402.2169
	6	722.22	0.9145	660.47		6	433.33	0.9145	396.2803
	7	722.22	0.9010	650.72		7	433.33	0.9010	390.4303
	8	722.22	0.8877	641.11		8	433.33	0.8877	384.667
	9	722.22	0.8745	631.58		9	433.33	0.8745	378.9471
	10	722.22	0.8616	622.26		10	433.33	0.8616	373.3571
	11	722.22	0.8489	613.09		11	433.33	0.8489	367.8538
	12	722.22	0.8364	604.06		12	433.33	0.8364	362.4372
	13	722.22	0.8240	595.11		13	433.33	0.8240	357.0639
	14	722.22	0.8118	586.30		14	433.33	0.8118	351.7773
	15	722.22	0.7998	577.63		15	433.33	0.7998	346.5773
	16	722.22	0.788	569.11		16	433.33	0.788	341.464
	17	722.22	0.7763	560.66		17	433.33	0.7763	336.3941
	18	722.22	0.7649	552.43		18	433.33	0.7649	331.4541
	19	722.22	0.7536	544.26		19	433.33	0.7536	326.5575
	20	722.22	0.7425	536.25		20	433.33	0.7425	321.7475
	21	722.22	0.7315	528.30		21	433.33	0.7315	316.9809
	22	722.22	0.7207	520.50		22	433.33	0.7207	312.3009
	23	722.22	0.7101	512.85		23	433.33	0.7101	307.7076
	24	722.22	0.6995	505.19		24	433.33	0.6995	303.1143
	25	722.22	0.6892	497.75		25	433.33	0.6892	298.651
	26	722.22	0.679	490.39		26	433.33	0.679	294.2311
	27	722.22	0.6689	483.09		27	433.33	0.6689	289.8544
	28	722.22	0.6591	476.02		28	433.33	0.6591	285.6078
	29	722.22	0.6493	468.94		29	433.33	0.6493	281.3612
	30	722.22	0.6397	462.00		30	433.33	0.6397	277.2012
	31	722.22	0.6303	455.22		31	433.33	0.6303	273.1279
	32	722.22	0.621	448.50		32	433.33	0.621	269.0979
	33	722.22	0.6118	441.85		33	433.33	0.6118	265.1113
	34	722.22	0.6027	435.28		34	433.33	0.6027	261.168
	35	722.3	0.5938	428.90		35	433.33	0.5938	257.3114
		28000		21303.87		36	433.33	0.5851	253.5414
	AT THE END OF 3rd year			37	433.33	0.5764	249.7714
			PV OF RESALE PRICE (19000*1.643)	31217		38	433.33	0.5679	246.0881
			Profit	9913.13		39	433.33	0.5595	242.4481
						40	433.33	0.5512	238.8515
						41	433.33	0.5431	235.3415
						42	433.33	0.5351	231.8749
						43	433.33	0.5272	228.4516
						44	433.33	0.5194	225.0716
						45	433.33	0.5117	221.735
						46	433.33	0.5042	218.485
						47	433.33	0.4967	215.235
						48	433.33	0.4893	212.0284
						49	433.33	0.4821	208.9084
						50	433.33	0.475	205.8318
						51	433.33	0.4679	202.7551
						52	433.33	0.4611	199.8085
						53	433.33	0.4543	196.8618
						54	433.33	0.4475	193.9152
						55	433.33	0.4409	191.0552
						56	433.33	0.4344	188.2386
						57	433.33	0.4279	185.4219
						58	433.33	0.4217	182.7353
						59	433.53	0.4154	180.0884
							28000.00		18336.78

						AT THE END OF 5th year
								PV OF RESALE PRICE(14000*2.2877)	32027.8
								Profit	13691.02



ANSWER C

				FOR 3 YEARS					FOR 5 YEARS
	MONTHS	Leasepayment	PV Factor	Presnt value		MONTHS	Leasepayment	PV Factor	Presnt value
	0	1750	1	1750		0	1450	1	1450
	1	750	0.9852	738.90		1	450	0.9852	443.34
	2	750	0.9706	727.95		2	450	0.9706	436.77
	3	750	0.9563	717.23		3	450	0.9563	430.335
	4	750	0.9422	706.65		4	450	0.9422	423.99
	5	750	0.9282	696.15		5	450	0.9282	417.69
	6	750	0.9145	685.88		6	450	0.9145	411.525
	7	750	0.9010	675.75		7	450	0.9010	405.45
	8	750	0.8877	665.78		8	450	0.8877	399.465
	9	750	0.8745	655.88		9	450	0.8745	393.525
	10	750	0.8616	646.20		10	450	0.8616	387.72
	11	750	0.8489	636.68		11	450	0.8489	382.005
	12	750	0.8364	627.30		12	450	0.8364	376.38
	13	750	0.8240	618.00		13	450	0.8240	370.8
	14	750	0.8118	608.85		14	450	0.8118	365.31
	15	750	0.7998	599.85		15	450	0.7998	359.91
	16	750	0.788	591.00		16	450	0.788	354.6
	17	750	0.7763	582.23		17	450	0.7763	349.335
	18	750	0.7649	573.68		18	450	0.7649	344.205
	19	750	0.7536	565.20		19	450	0.7536	339.12
	20	750	0.7425	556.88		20	450	0.7425	334.125
	21	750	0.7315	548.63		21	450	0.7315	329.175
	22	750	0.7207	540.53		22	450	0.7207	324.315
	23	750	0.7101	532.58		23	450	0.7101	319.545
	24	750	0.6995	524.63		24	450	0.6995	314.775
	25	750	0.6892	516.90		25	450	0.6892	310.14
	26	750	0.679	509.25		26	450	0.679	305.55
	27	750	0.6689	501.68		27	450	0.6689	301.005
	28	750	0.6591	494.33		28	450	0.6591	296.595
	29	750	0.6493	486.98		29	450	0.6493	292.185
	30	750	0.6397	479.78		30	450	0.6397	287.865
	31	750	0.6303	472.73		31	450	0.6303	283.635
	32	750	0.621	465.75		32	450	0.621	279.45
	33	750	0.6118	458.85		33	450	0.6118	275.31
	34	750	0.6027	452.03		34	450	0.6027	271.215
	35	750	0.5938	445.35		35	450	0.5938	267.21
		28000		22055.95		36	450	0.5851	263.295
	AT THE END OF 3rd year			37	450	0.5764	259.38
			PV OF RESALE PRICE (20000*1.643)	32860		38	450	0.5679	255.555
			Profit	10804.05		39	450	0.5595	251.775
						40	450	0.5512	248.04
						41	450	0.5431	244.395
						42	450	0.5351	240.795
						43	450	0.5272	237.24
						44	450	0.5194	233.73
						45	450	0.5117	230.265
						46	450	0.5042	226.89
						47	450	0.4967	223.515
						48	450	0.4893	220.185
						49	450	0.4821	216.945
						50	450	0.475	213.75
						51	450	0.4679	210.555
						52	450	0.4611	207.495
						53	450	0.4543	204.435
						54	450	0.4475	201.375
						55	450	0.4409	198.405
						56	450	0.4344	195.48
						57	450	0.4279	192.555
						58	450	0.4217	189.765
						59	450	0.4154	186.93
							28000		18986.32

						AT THE END OF 5th year
								PV OF RESALE PRICE(15000*2.2877)	34315.5
								Profit	15329.18

ANSWER D
Recommendation:

As we increase the lease term, we earn more profits.Therefore it will be benificial if lease term is more. Accepting more amount of down payment will be always benefial for the lessor
The risks which are associated with the lease are that there would be the maintenance expenses which has to be paid to keep the asset in the working condition
Since the profitable situation is with more no of years of lease term and the lease term increases maintainance cost will also increase.

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