Question

You are in the process of getting a new car but are not sure if you should buy or lease. The price of the car you want is $18,000, but you do not want to spend more than $250 a month on car payments. If you lease the car, the terms of the lease will be 48 months at an annual interest rate of 5%. The residual value of the car will be set at $9,000. If you buy the car, your bank will offer you a 7-year loan at an annual interest rate of 6%. You are not required to make a down payment with either the lease or loan options, and payments are made at the end of the month for both options.
Should you lease or buy the car given your budget limit of $250 a month? Create a new workbook and design a worksheet that shows the difference between leasing and buying the car in terms of monthly payments. Use proper formatting so your worksheet is easy to read. Remember to use column and row headings, add a title to your worksheet, and rename the worksheet tab with an appropriate label. Include your name in the file name of the workbook.

Answer 1

Answer:

You should buy the car.

Explanation:

Note: See the attached excel file for the worksheet that shows calculations of the present values of the Lease and Buy Options.

In the attached excel file, we have:

Net present value of Lease Option = $3,654.01

Total present value of Buy Option = $4,135.47

Difference = Total present value of Buy Option - Present value of Lease Option = $481.46

The Difference above shows that the total present value of Buy Option is greater than the net present value of Lease Option by $481.46.

Since the total present value of Buy Option of $4,135.47 is greater than the net present value of Lease Option of $3,654.01, you should buy the car.

Download xlsx