Missing Question Data:
The question was missing the total amount of loan taken. I have found the question online and the missing data is added below.
Explanation:
DATA:
Car Loan = $15000
Interest Rate (annual) = 7% = 0.07
Interest Rate (monthly) = 0.07/12 = 0.00583
Loan Life = 3 years
Period (monthly) = 3*12 = 36
Investment Rate (annual) = 4% = 0.04
Investment Rate (monthly) = 0.04/12 = 0.00333
Salvage value after 3 years (PV of Salvage Value) = $5000
Lease Down Payment = $3000
Lease Monthly Payment = $350
<h3>First, we consider the option of Buying on Loan</h3>Car Loan - Salvage Value(PV) = 15000-5000
Car Loan - Salvage Value(PV) = $10000
<h3>For the option of Leasing the Car</h3>Sum of monthly lease payments for the total period will be,
Sum of Installments (FV) = 350 * 12 = $12600
We know that,
Sum of Installments (PV) =
Sum of Installments (PV) = $11178.76
Total Lease Payment = Down Payment + Sum of Installments (PV)
Total Lease Payment = $3000 + $ 11178.76
Total Lease Payment = $14178.76
As we can see that total investment for Loan option is lower than that of Lease option, hence taking Loan is the best choice.