Question

ompare the cost of the following leasing agreement with the finance charge on a loan for the same time period: The value of the car is $15,000 at the beginning of the lease period, and its projected residual value at the end of three years is $4,000. The lease requires a $500 down payment. Monthly payment $315 Acquisition fee $300 Disposition charge $150 Other things being equal, one would want to finance this car rather than take this lease if the finance cost were ____ or less.

Answer 1

One would want to finance this car rather than take this lease if the finance cost were $11,000 or less

Step-by-step explanation:

a). Finance charge on the loan

Step 1: Determine the depreciation cost

The depreciation cost can be determine using the expression below;

Depreciation cost=Purchase value-salvage value

where;

Purchase value=$15,000

salvage value=$4,000

replacing;

Depreciation cost=15,000-4,000=$11,000

The total finance charge=$11,000

b). Cost of leasing agreement

Step 2: Determine cost of leasing agreement

Cost of leasing agreement=down payment+monthly payment+acquisition fee

where;

down payment=$500

monthly payment=$315

total monthly payment for 3 years=315×12×3=$11,340

acquisition fee=$300

disposition charge=$150

replacing;

cost of leasing agreement=500+11,340+300+150=$12,290

cost of leasing agreement=$12,290

The cost of lease agreement ($12,290) is greater than the total finance charge ($11,000)

One would want to finance this car rather than take this lease if the finance cost were $11,000 or less