You are interested in either buying or leasing a car. The price of the car is $50000.
Question:
You are interested in either buying or leasing a car. The price of the car is $50000.
If you buy the car, you have to make a downpayment of 30% of the car price today. Thereafter, you will finance the balance with a 3-year car loan at 5% per annum.
If you lease the car, you do not have to make the downpayment. The monthly lease is $850. At the end of 3 years, you plan to purchase the car from the car-leasing firm by paying a residual value of $25000.
You have access to an investment product that yields 6% per annum.
The first loan repayment or first lease payment would occur at the end of the next period.
(a) Suppose you choose to lease the car, how much savings would you have at the end of the term?
(b) Suppose the car-leasing firm decides to raise the monthly fee to lease the car. Keeping constant all other model parameters, what is the minimum monthly lease such that buying the car is financially more attractive?
