Question

You must decide whether to buy a new car for $18,000 or lease the same car over a three-year period. Under the terms of the lease, you can make a down payment of $3,000 and have monthly payments of $150. At the end of the three years, the leased car has a residual value (the amount you pay if you choose to buy the car at the end of the lease period) of $12,000. Assume you can sell the new car at the end of the three years at the same residual value. Is it less expensive to buy or to lease?

a) Buying the car and selling it after three years would cost $3,000
b) Buying the car and selling it after three years would cost $15,000
c) Leasing the car would be less expensive
d) Leasing the car would be more expensive

Answer 1

Buying the car and selling it after three years would cost $15,000.

Step-by-step explanation:

To determine whether it is more cost-effective to buy or lease a car, we need to compare the total costs of each option.

If you buy the car for $18,000 and sell it after three years at the residual value of $12,000, your total cost would be $18,000 - $12,000 = $6,000.

On the other hand, if you lease the car, you would make a down payment of $3,000 and have monthly payments of $150 for three years, totaling $3,000 + ($150 * 36) = $8,400.

Therefore, buying the car would cost $6,000, while leasing it would cost $8,400. Since buying the car is less expensive, the answer is d) Buying the car and selling it after three years would cost $15,000.