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Two different leasing options are listed for a truck (worth $27,995 new). How much more must...

Two different leasing options are listed for a truck (worth $27,995 new). How much more must be paid in monthly fees over the full 4 years to take option 2 (instead of option 1)?  What is that extra money getting you?

Option 1: Take out a 4-year lease.  That is, drive the same car for 4 years paying a monthly fee of $247.28, then turn the car in.  

Option 2: Take out two consecutive 2-year leases.  That is, after 2 years, turn in the car and lease a new Wrangler for another 2 years.  The lease payments would be $257.69 per month.

If you don’t lease at all but take out a 4-year loan at 4.2% interest compounded monthly to buy the car, should the monthly payments be more or less than option A?  Why? What will your monthly loan payment be?  

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Expert Solution

Two different leasing options are listed for a truck (worth $27,995 new). How much more must be paid in monthly fees over the full 4 years to take option 2 (instead of option 1)?  What is that extra money getting you?

Total monthly payments in Option 1 for last 2 years = Monthly Payment * 2 years * 12 months

Total monthly payments in Option 1 for last 2 years= $247.28 * 24

Total monthly payments in Option 1 for last 2 years= $5934.72

Total monthly payments in Option 2 for last 2 years= Monthly Payment * 4 years * 12 months

Total monthly payments in Option 2 for last 2 years= $257.69 * 24

Total monthly payments in Option 2 for last 2 years= $6184.56

Extra payment to be paid to get option 2 = 6184.56 - 5934.72 = $249.84

This extra payment is getting us New Wrangler

If you don’t lease at all but take out a 4-year loan at 4.2% interest compounded monthly to buy the car, should the monthly payments be more or less than option A?  Why? What will your monthly loan payment be?  

Monthly Payment in Bank Loan = Car Price / PVAF(0.35%,48)

Monthly Payment in Bank Loan = $27995/ 44.1138

Monthly Payment in Bank Loan = $634.61

The monthly payments on Loan of $634.61 is more than option A

The monthly payment is higher than option A because you we are not paying entire car price in lease payment and we are going to own the Car which is not a case in the Lease

What will your monthly loan payment be? $634.61

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jeff jeffy answered 1 year ago
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