Question

Compute the interest paid on a 3-year lease for a $28805 car if the annual rate of depreciation is 19% and the lease's annual interest rate is 3.8%.

Answer 1

First of all by using present value of annuity formula , we can find out the monthly payment towards lease.
Present value of annuity = P*{[1-(1+r)^-n]/r}
Present value of annuity = lease liability = $28,805
P = Lease monthly payment = ?
r = rate of interest per month = 3.8% /12 = 0.003167
n = no.of months lease payments = 3 years * 12 = 36
28805 = P*{[1-(1+0.003167)^-36]/0.003167}
28805 = P * 33.97305
P = 847.88
Lease monthly payment = $847.88
Total interest paid on 3 year lease = (Monthly payment * no.of months lease payment) - Lease liability
Total interest paid on 3 year lease = ($847.88 * 36) - $28,805
Total interest paid on 3 year lease = $1718.61