Question

You are planning to acquire a new car with a negotiated purchase price of $50,000. You prefer to turn your cars over after 4 years. You have two financing choices: lease or borrow & buy. You can obtain a four-year loan at 6% annual rate (which means 0.5% monthly rate) for the entire purchase price of the car. A four-year lease (equal monthly lease payments start immediately) requires a down payment of $4,000. The market value of the car is expected to depreciate 48% in four years. What is the break-even lease payment? Assume taxes are irrelevant to this problem.

My professor said the answer is between 575-600. I am not getting this answer. Please help.

Answer 1

your question doesn't include information about discount rate and repayment of loan so my answer include following assumptions

-repayment of principle of loan is 12500 every year end

1st option borrow and buy

step 1 calculations of interest

yr. int

1. 3000 ( 50000*6%)

2. 2250 ( 37500*6%)

3. 1500 ( 25000*6%)

4. 750. (12500*6%)

TOTAL. 7500

step 2 calculations of total outflow

int. (7500)

loan repayment (50000)

scarp value. 26000

Total. 31500

option 2

calculations of equal monthly lease payment

total outflow of option 1 - down payment

31500-4000=27500

therefore monthly = 27500/48

=573

note :- my answer ignore the discount factor if you have then put the formula of discount factor the logic will remain same