3. Lease vs Buy: You are considering whether to buy or lease a Jeep Wrangler. For a Wrangler priced at $29,540, if you purchase it you will have a payment of $6,024/year ($502/month) for five years (at 5 percent financing with $2,954 down). If you lease you will pay $3,300/year ($275/month) for five years, with a down payment of $1,200. Note that these are monthly payments but we will treat these as annual payments for the calculations to simplify (i.e., just use $6,024 for the purchase and $3,300 for the lease annually). At the end of five years, the Jeep will have a salvage value of $17,000. Also, assume that the down payment and first year payments are due today (i.e., time zero) so that the second year payment is due in one year, third year payment in two years, etc. (this is important for discounting).
3. Lease vs Buy: You are considering whether to buy or lease a Jeep Wrangler. For a Wrangler priced at $29,540, if you purchase it you will have a payment of $6,024/year ($502/month) for five years (at 5 percent financing with $2,954 down). If you lease you will pay $3,300/year ($275/month) for five years, with a down payment of $1,200. Note that these are monthly payments but we will treat these as annual payments for the calculations to simplify (i.e., just use $6,024 for the purchase and $3,300 for the lease annually). At the end of five years, the Jeep will have a salvage value of $17,000. Also, assume that the down payment and first year payments are due today (i.e., time zero) so that the second year payment is due in one year, third year payment in two years, etc. (this is important for discounting).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:3. Lease vs Buy: You are considering whether to buy or lease a Jeep Wrangler. For a Wrangler
priced at $29,540, if you purchase it you will have a payment of $6,024/year ($502/month) for
five years (at 5 percent financing with $2,954 down). If you lease you will pay $3,300/year
($275/month) for five years, with a down payment of $1,200. Note that these are monthly
payments but we will treat these as annual payments for the calculations to simplify (i.e., just use
$6,024 for the purchase and $3,300 for the lease annually). At the end of five years, the Jeep will
have a salvage value of $17,000. Also, assume that the down payment and first year payments
are due today (i.e., time zero) so that the second year payment is due in one year, third year
payment in two years, etc. (this is important for discounting).
a. After 4 years, how much more will the purchase have cost than the lease (i.c., total
nominal money paid out)? Consider the total costs without time value of money.
b. Assuming a discount rate of 6%, calculate the present value of the buy and lease cost on
an annualized basis. Report the present values and indicate which is preferred.
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