Upon graduation, you land a job with a $120,000 salary. The firm also happens to know that your favorite car is the BMW 745i. So to sweeten the deal, the firm also offers to give you $40,000 in cash towards the purchase of the car, or to reimburse you for five years of monthly payments if you lease the car. If you buy the car: The price of the car is $66,000. You're still short on cash, so if you want to purchase the car, you have to borrow at 12% (the annual percentage rate or APR) by taking out a five-year loan with monthly payments. The loan payments are at the end of each month. If you lease the car: The monthly lease payments are $900 for five years. The contract stipulates that at end of the lease you can either purchase the car for $36,000 or walk away. The lease payments are also due at the end of the month. Assume that you know with certainty that you will work for the firm for at least five years, and that you will be able to sell the car, if you wanted to, for $38,000 after five years. You can borrow or lend at an annual rate of 12% (monthly compounding). 

a) Ignoring the firm's offer, would it be cheaper for you to lease or to purchase the car with a loan if you plan to keep the car for at least five years? 

b) Now consider the firm's offer. Should you take the $40,000 cash or the $900 monthly reimbursements?

Answer rating: 100% (QA)

Lets analyze both options a Ignoring the firms offer Buying the car with a loan Price of the car 660... View the full answer