Question

A local car dealership is advertising a 24-month lease of a Lexus for $520 payable at the beginning of each month. The lease requires a $2500 down payment plus a $500 refundable security deposit. As an alternative, the dealership offers a 24-month lease with a single up-front payment of $12,780 plus a $500 refundable security deposit. The security deposit will be refunded at the end of the 24-month lease. Assuming an interest rate of 6% compounded monthly, which lease is preferable? By hand and with excel

Answer 1

Since both the options require $500 refundable security, we can neglect that.

Monthly interest rate = 6%/12 = 0.5% = 0.005

For 1st option, present value =

For 2nd option, present value = $12,780

Since the present value of 1st option is greater than that of 2nd option, we should go with 1st option.

Please do rate me and mention doubts, if any, in the comments section.