Question

it's time for a new car, to be used for business use, of course. You only need it for 3 years before you'll want to start looking for something else, and you've got three options, described below. In options A and B, the car may be sold at the end of 3 years for $7500. Given a 12% interest rate, compounded MONTHLY (so think about how many periods you have, too), compute the EUAC for option A:

Option A: Buy it: Just buy the car with cash - $26,000.

Option B: Lease-to-own: Lease the car at a monthly charge of $720 per month, payable at the end of each month, for 36 months. You can buy the car at the end of the lease period for a cost of $7000. <Remember, you can sell the car for $7500 in this and the previous option>

Option C: Lease-and-return: Lease the car for $700 per month, payable at the end of each month, with no money down. At the end of the lease, the car is returned to the leasing company.

Find option B also for euac

Answer 1

Option A: Buy the car with cash - $26,000 and sell it at the end of 3 years or 36 months for $7500. Find EUAC at 12% interest rate, compounded MONTHLY so that effective rate is 1% per month

EUAC = 26000(A/P, 1%, 36) – 7500(A/F, 1%, 36)

= 26000*0.0332 – 7500*0.0232

= $689

Option B: Lease-to-own: Lease the car at a monthly charge of $720 per month, payable at the end of each month, for 36 months. You can buy the car at the end of the lease period for a cost of $7000.

EUAC = 720 + 7000(A/F, 1%, 36) – 7500(A/F, 1%, 36)

= 720 + (7000 – 7500)*0.0232 = 708

Option C: Lease-and-return: Lease the car for $700 per month

EUAC = $700.

Option A is least expensive so select A.