You have decided to acquire a new car that costs $30,000. You are considering whether to lease it for three years or to purchase it and financing the purchase with a three year installment loan. The lease requires no down payment and lasts for three years. Lease payments are $400 monthly starting immediately, whereas the installment loan will require monthly payments starting a month from now at an annual percentage rate (APR) of 8%. The discount rate (APR) is also 8%. 1) If you expect the resale value of the car to be $20,000 three years from now, should you buy or lease it? 2) What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?
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