Evaluating Alternatives using Annuities
Do not round intermediate calculations
After deciding to acquire a new car, you realize you can either lease the car or purchase it with a four-year loan. The car you want costs $33,500. The dealer has a leasing arrangement where you pay $96 today and $496 per month for the next four years. If you purchase the car, you will pay it off in monthly payments over the next four years at an annual percentage rate of 7 percent. You believe that you will be able to sell the car for $21,500 in four years.
a. What is the present value of leasing the car?
b. What is the present value of purchasing the car?
c. What is the resale price in four years that would make you indifferent between buying and leasing?