Question

Bart Simpson is trying to decide whether or not he should lease or buy a new viper. The viper can be leased for $10,000 per year (first payment made right now) for 10 years or he can buy the car outright for a cost of $65,000. Bart has located a bank that will lend him the $65000 at a cost of 15.75%. Bart will drive the car for 10 years and will abuse viper to the point that it will have no resale value. Bart also lives in a world of no uncertainty and pays no taxes.

Should Bart buy or lease the viper? What is Bart's present value of the lease payments? Barts implied interest rate in the lease payment is?

Answer 1

	PV of cost of leasing
year	Annual lease payment	Disc Factor @ 15.75%	PV of Lease Rentals
	in $s
1	10,000.00	1	10,000.00
2	10,000.00	0.863930886	7,463.77
3	10,000.00	0.746376575	6,448.18
4	10,000.00	0.644817775	5,570.78
5	10,000.00	0.557077992	4,812.77
6	10,000.00	0.481276883	4,157.90
7	10,000.00	0.415789963	3,592.14
8	10,000.00	0.359213791	3,103.36
9	10,000.00	0.310335889	2,681.09
10	10,000.00	0.268108759	2,681.09
	Total Present Value =		50,511.06
	PV of Cost of owning	65000

Bart will go for leasing Because the PV of cost of Owning Viper is $65000 but PV of cost of lesing will only be $ 50511

Bart's present value of the lease payments​ = 50,511.06 computation is given above

.Barts implied interest rate in the lease payment is 15.75%