You ordered a Tesla Model S Long Range and will receive delivery of it later this afternoon.

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Question:

You ordered a Tesla Model S Long Range and will receive delivery of it later this afternoon. You are deciding whether you should finance it using a loan offered by Tesla or whether you should lease it. Your personal discount rate is 5% (EAR).

Purchasing with Loan: The cash price of the car is $86,200. In addition, you will need to pay the State of Texas a motor vehicle sales and use tax of 6.25% on the cash price. Tesla offers you a 72-month loan at a rate of 3.75% APR (with monthly compounding) if you make a down payment of $7,500 on the cash price. You need to pay the initial down payment of $7,500 and the state tax on delivery. You will borrow the remaining costs of the car using the Tesla loan offer. Purchasing an electric car qualifies you for a federal tax credit of $1,875, which you will receive when you file your taxes six months from now.

Leasing: Tesla offers you a 36-month lease contract with a mileage allowance of 12,000 miles per year. The initial down payment (including the first lease payment, state motor vehicle sales taxes, and other fees) is $9,855.75 due at delivery. The subsequent 35 lease payments are $1,148.56 per month. You will not be able to obtain the federal tax credit if you lease, but this credit is effectively incorporated in the lease payments that Tesla offers you.

a. Compute the monthly payment for the 72-month car loan.

b. Suppose you plan to keep your car for 36 months. If you decide to lease the car, then you will return your car to Tesla after 36 months and you will then need to pay a disposition fee of $395. If you decide to buy the car instead, then you will trade-in your car after 36 months and pay back the remaining debt on the car loan. You expect to trade-in your car for $48,000. Is it better to purchase the car or to lease the car? (Hint: Compute the present values of all the monthly cash flows under both scenarios using your discount rate of 5% (EAR).)

c. The previous example uses an anticipated trade-in value of $48,000. However, this value is currently not known. At which trade-in value will the present value of buying equal the present value of leasing?

d. What other considerations besides the cash flows given above should you consider when deciding between buying and leasing a car?