Suppose you can buy a new Toyota Corolla for $19,000 and sell it for $13,000 in the third year. For simplification, assume you sell the car at the beginning of the third year but can keep driving it until the end of the third year. Alternatively, you can lease the car for $325.00 per month for three years and return it at the end of the three years. For simplification, assume that lease payments are made yearly instead of monthly-i. e., that they are $3,900 per year and are made at the beginning of each of the three years. If the interest rate, R, is 4 percent, is it better to lease or buy the car? If the interest rate is 4 percent, then it is better to Which is better if the interest rate is 11 percent?

a). If the interest rate is 4% then buying and selling later would save you a lot of money as compared to leasing

b). If the interest rate is 11% then buying and selling later would save you a lot of money as compared to leasing

Explanation:

a).

Step 1

Compute the loss if you buy the car and sell it by the third year as follows;

loss=purchase price-sale price

where;

purchase price=$19,000

sale price=$13,000

replace;

loss = (19,000-13,000) = $6,000

Step 2

Compute the profit or loss from leasing

Annual payments=$3,900

Total payments=annual payments*number of years

total payments=3,900*3=$11,700

Amount=11,700 (1+0.04) ^3=$13,160.9088

If the interest rate is 4% then buying and selling later would save you a lot of money as compared to leasing

b).

Amount when interest rate=11%

Amount = 11,700 (1+0.11) ^3=$16,0001.2827

If the interest rate is 11% then buying and selling later would save you a lot of money as compared to leasing