Buy or Lease

In: Business and Management

Submitted By salbazaz
Words 747
Pages 3
Amy is trying to decide if she should buy a car or lease the same car. The car salesman has told her that she can buy the car for $27,000. She will need a down payment of $2,700. The remainder will be financed with a loan. It will cost her 4.5% compounded semi-annually. She will make 60 monthly payments at the end of each month. If she leases the car, Amy will not put any money down. However, she will be required to pay $12,500 at the end of the lease. Amy will make 60 monthly lease payments of $250. The lease payments will be made at the beginning of each month. Assume the appropriate interest rate is 7.3% compounded semi-annually.

a) Draw two detailed timelines and label all components displaying the details of leasing and buying the car. b) What are the (1) effective annual rates (EAR) and the (2) effective periodic rates (EPR) of the (i) bank loan rate and (ii) the lease rate? c) What is the present value of the car if Amy buys the car as opposed to leasing? What is the present value if Amy leases the car as opposed to buying? d) If Amy had the option to make 48 monthly payments to buy or lease the car, what would be the new monthly loan payments and the monthly lease payments? e) Using the information from part c) and d), summarize if Amy should buy or lease the car under the 48 month plan or the 60 month plan.

S O L U T I O N
a)
Purchasing the car
Given: PV FV PMT n (yr) r 27000 0 ? 5 4.50% Solve for PMT PMT= $453.03 Timeline: yr 0 yr 1 yr 2 yr 3 yr 4 yr 5
PMT= 2700 12*$453 12*$453 12*$453 12*$453 12*$453

Leasing the car
Given: PV FV PMT n…...

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