Homework study question A2:

James works for Scotiabank, and inside a year, he had saved 5,000.00$ and wanted to buy a new car but was unsure if he should lease or buy it through financing from his bank. Assume a rate of interest of 5.40% compounded annually for both options.

a) A sales rep at the dealership gave James a table showing the comparison of the lease versus finance options for the car he liked (fill in the table);

LEASING

FINANCING

down payment	5,000	5,000
interest rate compounded annually	5.40%	5.40%
list price	--------------------------	27,800
additional purchase costs	--------------------------	1,954
HST @ 13%	--------------------------
net price	---------------------------
term in months	60	60
monthly payments	(beginning of month payments)
residual (fv) payment to own	12,000	--------------------------

b. create a detailed timeline for the lease option. 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. what option would be most economical for James? 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 for James if the residual value was $20,000 (including HST) for the lease option? why?