Question

Your car dealer is willing to lease you a new car for $309 a month for 72 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of the lease

Answer 1

Answer:

PV $19,242.04

Explanation:

We will calculate the present value of an annuity using our cost of capital

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C      309

time 72

rate           0.004083333 (A)

$309 \times \frac{1-(1+0.0040833)^{-72} }{0.0040833} = PV$

PV $19,242.04

This will be the present value of the lease at our capital rate.

Notes

(A)The payment are on a monthly basis, so the interest rate must be monthly to. For that we divide the 4.9 percent which is annual by 12

That way the time and rate are on the same metric.