Janice needs a vehicle for daily commuting to work and weekend jaunts to the national park. With interest rates low and dealer incentives abundant, she figures the timing is perfect to acquire a car. After a few weeks of visiting dealers and test driving cars, Janice decides to solicit purchase prices on her favorite car, the Honda Accord, from many dealers through the on-line car sales function. In the total cost of purchasing the car, she includes the dealer incentives, all destination charges, sales tax, title and registration fees. She has no vehicle for a "trade-in", so the sales price is the final price out of her pocket.

The lowest sales price offered by a dealer from her search is $25,000. The dealer has offered her two choices for financing the purchase. With 20% down, she can take out an auto loan at 6% annual percent rate (APR) to be paid over next four years. Alternately, with $5000 cash down, she can lease the car for next four years at $299 per month, with an option to buy it for $9,000 at the end of the lease term. As an added incentive, the sale representative waives any security deposit he usually requires for excessive wear and tear of the car, as well as any mileage charges for driving over the customary 12,000 miles per year.

Janice studies the BlueBook prices and expects the value of the Honda Accord to depreciate at an annual rate of 15%. Although not sure, she thinks a fair personal discount rate for her situation is 9% per year. She reasons that it is the target rate of return for her retirement account. After all, any extra money goes into that account with that target return rate.

a. What will be Janice's monthly payment under the buy option?

b. Should she buy or lease the car?

c. What other concerns would you raise with leasing?