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Question

Suppose you are deciding whether to buy or lease a car. If you buy the car, it will

cost $17,000 today (t = 0). You expect to sell the car four years (48 months) from now for

$6,000 (at t = 48). As an alternative to buying the car, you can lease the car for 48 months. All


lease payments would be made at the end of the month. The first lease payment would occur next

month (t = 1) and the final lease payment would occur 48 months from now (t = 48). If you buy

the car, you would do so with cash, so there is no need to consider financing. If you lease the car,

there is no option to buy it at the end of the contract. Assume that there are no taxes, and that the

operating costs are the same regardless of whether you buy or lease the car. Assume that all cash

flows are discounted at a nominal annual rate of 12%, so the monthly periodic rate is

1%. What is the breakeven lease payment? (That is, at what monthly payment would you be

indifferent between buying and leasing the car?)

N = 48, I/Y = 1, PV = -17,000, FV = 6,000, Compute PMT = 349.67

Step-by-step answer

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