| Question |
Frequently we read in the newspaper that one should lease an automobile rather than buying it. For a typical 24-month lease on a car costing $9400, the monthly lease charge is about $267. At the end of the 24 months, the car is returned to the lease company (which owns the car). As an alternative, the same car could be bought with no down payment and 24 equal monthly payments, with interest at a 12%nominal annual percentage rate. At the end of 24 months the car is fully paid for. The car would then be worth about half its original cost. (a) Over what range of nominal before-tax interest rates is leasing the preferred alternative? (b) What are some of the reasons that would make leasing more desirable than is indicated in (a)? |
