Question

Joan has a choice of purchasing a car for $20,000 with 9.7 percent interest cost to borrow and a three-year repayment period for leasing the vehicle. Leasing the auto would cost $300 a month for a three-year term. The sales tax is 6 percent. The car is expected to have a value of $14,000 at the end of the leasing period. Joan can obtain 7 percent after tax on similar marketable investments. Should she lease or buy the car

Answer 1

Joan should buy the car instead of leasing it.

Step-by-step explanation:

Residual value of the car at year3 is $14,000

The sales tax of the car is 6% * $20,000 = $1200

Annual payment of the money borrowed for car:

PV = $20,000, I/Y = 9.7/12, FV = 0, PMT = $642.53

Annual payment : $642.53 * 12 = $7,710

Cost of owning the car:

$1,200 + $7,710 + $7,710 + $7,710 - $14,000 = $10,330

Lease Rentals :

$3,600 + 3,600 + 3,600 = $10,800

The cost of owning a car is lower than rentals so Joan should go with the buying choice.