After deciding to acquire a new car, you realize you can either lease the car or purchase it with...

Question:

After deciding to acquire a new car, you realize you can either lease the car or purchase it with a three-year loan. The car you want costs $32,500. The dealer has a leasing arrangement where you pay $94 today and $494 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next three years at an APR of 6 percent. You believe that you will be able to sell the car for $20,500 in three years.

What is the present value of purchasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16)

What is the present value of leasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16)

What break-even resale price in three years would make you indifferent between buying and leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16)

Present Value (PV):

Present value (PV) is expressed as the current value of money or sum of money received or due in the future. Present value (PV) is also termed as a present discounted value. While calculating the present value, the future cash value is discounted to the present day. Hence, the present value calculation is generally known as the discounted cash flow technique.

Answer and Explanation:

The asset is a car.

Buying cost of car = $32,500.

APR (r) = 6% = .06.

Monthly APR = 0.06 / 12 = 0.005 (rate of return)

Terms (n) = 3 years = 3 *...

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How to Calculate Present Value of an Investment: Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 15
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