Question

: For a typical 36-month lease on a car valued at $30,000, the monthly charge is about $600. At the end of the 36 months, the car is returned to the lease company. As an alternative, the same car could be bought with no down payment and 36 equal monthly payments, with a monthly interest rate of 1%. At the end of 36 months, the car would be fully paid for. The car would then be worth about half its original cost if sold. a) Calculate the monthly payments needed if you were to choose to buy the car. <3 pts> Answer: Reasoning/Work: b) Using the monthly difference in payments between leasing and buying, calculate the monthly incremental IRR (∆IRR). I suggest setting the salvage value of the car equal to future value of the monthly difference in payments to find ∆IRR. The equation should look like this: Salvage = (monthly difference)(F/A, ∆IRR, number of months) and use a solver to find ∆IRR. <3 pts> Answer: Reasoning/Work: c). What is the effective annual interest rate if compounded monthly? <2 pts> Answer: Reasoning/Work: d) Assume the potential purchaser could earn interest elsewhere (like via a bank account) by putting the monthly payment difference into an account. What range of effective yearly interest rates would that account have to earn for leasing be the financially preferred alternative? <2 pt> Answer: Reasoning/Work: e) Disregarding the option of investing the payment difference elsewhere, what are at least two reasons that would make leasing a more desirable alternative than purchasing? <2 pt> Answer:

Answer 1