Many individuals prefer to lease their vehicles rather than buy
them. A new Cadillac CTSV can...
Free
60.1K
Verified Solution
Link Copied!
Question
Finance
Many individuals prefer to lease their vehicles rather than buythem. A new Cadillac CTSV can be leased for a down payment of$6,000 and 36 end-of-the -month payments of $599. Alternately, thecar can be purchased for cash for $42,000 and a CTSV with about60,000 miles is estimated to have resale value of $20,000 in threeyears from now. Should one lease or buy if opportunity cost is6.36%APR?
Answer & Explanation
Solved by verified expert
4.1 Ratings (718 Votes)
One should buy this car.
Working;
Step-1:Calculation of present value of lease payments
Down
payment
$Â Â 6,000.00
Add:
present value of monthly payments
$
19,584.56
Present
value of lease options
$
25,584.56
Working;
Present value of annuity of 1
=
(1-(1+i)^-n)/i
Where,
=
(1-(1+0.0053)^-36)/0.0053
i
6.36%/12
=
0.0053
=
32.6954229
n
=
36
Present value of lease payments
=
Monthly lease payments
*
Present
value of annuity of 1
=
$Â Â Â Â Â Â Â Â Â Â Â Â
599
*
32.6954229
=
$
19,584.56
Step-2:Calculation of present value of buying option
Cost of
Car
$
42,000.00
Less
present value of salvge value
$
16,534.29
Present
value of buying option
$
25,465.71
Working;
Present
value of salvage value
=
$
20,000.00
x
1.0053^-36
=
$
20,000.00
x
0.82671426
=
$
16,534.29
Conclusion:
On
financial basis, present value of cash flow under buying option is
lesser.
So, it
should be beneficial to buy the car.
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
