Question

2a. Two different leasing options are listed below for a Jeep Wrangler (worth $27,995 new). How much more must be paid in monthly fees over the full 4 years to take option B (rather than option A)? What is that extra money getting you?

Option A: Take out a 4-year lease. That is, drive the same car for 4 years paying a monthly fee of $247.28, then turn the car in.

Option B: Take out two consecutive 2-year leases. That is, after 2 years, turn in the car and lease a new Wrangler for another 2 years. The lease payments would be $257.69 per month.

2b. If you don’t lease at all but take out a 4-year loan at 4.2% interest compounded monthly to buy the car, should the monthly payments be more or less than option A? Why? Go ahead and do the computation, what will your monthly loan payment be?

Answer 1

Ans 2a

Option B monthly payment = $257.69

Option A monthly payment = $247.28

Extra fee per month for option B over option A = (257.69-247.28) = $10.41

Total for 4 years will be = $10.41 x 48 months = $499.68

Ans 2b

Yes it should be more than option A, since lease payments under option A is much less than its price that is (247.28 x 48) = $11,869.44 lease cost < Price 27,995

Purchase price of new Wrangler = $27,995

Time = 4 years or 48 months

Interest rate = 4.2% p.a. or 0.35% per month

Using EMI formula

EMI = (p x r x (1+r)^n]/[(1+r)^n-1)

Putting values in formula

EMI = (27995 x 0.0035 x (1+0.0035)^48]/[(1+0.0035)^48-1)

= 115.8731/0.18259

EMI = $634.61

Monthly payment under loan are more than lease by (634.61-247.28) = $387.33