Question

3. You are deciding between leasing or purchasing a car and you need the car for the next four years. The details of these two alternatives are discussed below. Buy The initial cost will be $35,000. There will be major maintenance every two years, costing $2,000. The annual insurance on the car will cost $3,200 annual and the gas will cost $1,800 annually. You expect to sell the car for $8,000 dollars at the end of the four years. Lease The lease will have a monthly expense of $875. You will not need to pay for major maintenance on the lease, but you will need to pay for the insurance and gas. a. Assume a MARR of 15% compounded annually. Using two different time value of money techniques (e.g., PV, FV, PMT), determine which alternative is better. Also, make sure to include a discussing explaining why one alternative is better. b. If the life was extended to 10 years, assuming you could still sell the car for $8,000 dollars at the end of the 10 years, which method would be better. Use the same time value of money techniques, resolve, and compare your results. Setup the problem in an Excel spreadsheet and solve using spreadsheet functions. Present your work in a professional manner. Label the columns on the spreadsheet, the functions should use referenced cells, and the final answer should also be labeled. The work should be clear such that you can repeat similar calculations later.

Answer 1

Buying Option -4Years Lease Option (Annual Lease = 875*10500) Particular Cash Flow Discount Factor Discounted cash Flow Year Particular Cash Flow Discount Discounted cash Flow Year 0 Initial Cost 13478.26 35000 1 35000 1 LeaseInsuranace+Gas 15500 0.870 1 Insurance+ Gas 5000 0.870 15500 0.756 4347.83 2 Lease Insuranace Gas 11720.23 3 Lease +Insuranace +Gas 0.658 2 Insurance + Gas Major Mt. 7000 0.756 5293.01 15500 10191.50 0.658 15500 3 Insurance + Gas 5000 3287.58 4 LeaseInsuranace Gas 0.572 8862.18 4 Insurance +Gas + Major Mt. 7000 0.572 4002.27 4 Sale Proceeds Total (Net cost) -8000 0.572 -4574.03 44252.16 Total (Net cost) 47356.66 Better Option Take On Lease Due To Low Cost

Buying Option- 10 Years Lease Option (Annual Lease 875*10500) Particular Cash Flow Discount Factor Discounted cash Flow Particular Cash Flow Discount F Discounted cash Flow Year Year 0 Initial Cost 35000 1 Lease +Insuranace Gas 13478.26 35000 1 15500 0.870 1 Insurance Gas 5000 0.870 4347.83 2 Lease Insuranace Gas 15500 0.756 11720.23 3 LeaseInsuranace+Gas 2 Insurance Gas Major Mt. 7000 0.756 5293.01 15500 0.658 10191.50 15500 3 Insurance +Gas 5000 0.658 3287.58 4 Lease + Insuranace Gas 0.572 8862.18 4 Insurance Gas + Major Mt 0.572 15500 7706.24 7000 4002.27 5 LeaseInsuranace + Gas 0.497 5000 2485.88 6 Lease Insuranace+ Gas 5 Insurance +Gas 0.497 15500 0.432 6701.08 6 Insurance+Gas + Major Mt 7000 0.432 5827.02 3026.29 7 Lease Insuranace Gas 15500 0.376 5000 7 Insurance+Gas 0.376 1879.69 8 Lease Insuranace Gas 15500 0.327 5066.98 8 Insurance + Gas +Major Mt. 7000 0.327 2288.31 9 Lease Insuranace Gas 15500 0.284 4406.07 9 Insurance+Gas 5000 0.284 1421.31 10 Lease Insuranace Gas 15500 0.247 3831.36 Total Cost (net) 10 Insurance+ Gas +Major Mt. 7000 0.247 1730.29 77790.91 10 Sale Proceeds -8000 0.247 -1977.48 Total (Net Cost) 62784.99