Amandeep, a graduate of Cambrian College’s Business Program, found a job as an online marketing specialist for Tangerine Bank. Within a year, he had saved {A} and decided to buy a new car but was not quite sure if he should lease it or buy it through financing from the bank. Assume a rate of interest of {B} compounded annually for both options.

• Lease payments are subject to HST (Harmonized Sales Tax). Taxes should not be added to the list price or net price of the vehicle for the lease option, only to the payment.
• Additional purchase costs include freight & PDI, Air Conditioner Tax, Tire Tax, and registration fees.

b. Draw a detailed timeline for the lease option. Be sure to include the residual value (with HST) at the end of the last payment interval, the net price, and the after-tax payments at equal payment intervals.

c. Which option would be most economical for Amandeep? Show all calculations and provided a detailed explanation with your answer. Hint: Compare NPVs

d. What should the residual payment be (including taxes) in order to make both options equal?

e. Which option would be most economical if the residual value was $20,000 (including HST) for the lease option? Provide justification for your answer.

Leasing the car
Down payment	{A}	$4,000.00
Interest (compounded annually)	{B}	5.20%
List Price	{C}	$23,700.00
Additional purchase costs	{D}	$1,620.00
Term in months	{F}	72
Monthly payments (without HST)	{G}	$260.00
		(beginning-of-month payments)
Residual (FV) payment to own	{H}	$13,900.00
Financing the car
Down payment	{A}	$4,000.00
Interest (compounded annually)	{B}	5.20%
List Price	{C}	$23,700.00
Additional purchase costs	{E}	$1,863.00
Term in months	{F}	72

Answer rating: 100% (QA)

Solution Particulars Leasing the Car Financing the Car Down Payment 4000 4000 Interest rate Compound... View the full answer