Your client needs a new car and is trying to decide whether to (1) buy and pay cash, (2) buy fully financed, or (3) lease. The following terms are available:
If the car is purchased for cash:
- Cost new, $24,000
- Factory rebate available immediately, $2,000
If car is purchased fully financed:
- Cost new, $24,000
No down payment
- 100 percent financing by dealer at in = 6 percent, 36 monthly payments
If the same car is leased:
- Monthly lease fee paid in advance at BOM (beginning of the month), $450 per month (the first payment is due now).
- At the end of the 60-month lease period the client has an option to purchase the car for $1.00.
The client ordinarily invests and borrows at in = 12 percent compounded monthly, and expects to keep the car for 60 months.
a) Find the equivalent monthly cost over the life of the car of each of the three alternatives and select the lowest cost. (Disregard resale value at EOM
60, since it is the same in all three cases)
b) The dealer offers an additional bonus feature with the fully financed purchase offer where by the first payment is not due until EOM 4. Delivery of the car is made now, and interest at 6 percent accrues on the balance owed. The 36 monthly payments are calculated on the amount owed at EOM 3. Find the equivalent monthly cost over the life of the car of acquiring the car under this alternative.

  • CreatedSeptember 19, 2013
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