Reference no: EM132369085

Mary is interested in driving a new 2018 Ford Taurus for three years. Most dealers will give consumers two options-financing or leasing. The leasing (just like renting a car) deal usually requires a down payment (a onetime payment at the beginning) and a monthly payment for 36 months. At the end of leasing period, Mary can simply return the car to the dealer. Alternative she can purchase Taurus at $21,000 and keep the car forever. Suppose the car is worth 65% of the purchase price at the end of the 36 month (the price one can sell), and the current interest rate is 4% (APR on a monthly base).

(a) If there is no down payment, and Mary wants to use the leasing deal, how much monthly payment should the dealer charge Mary?

(b) Now if the dealer is offering a promotional financing deal that allows Mary to borrow at 1.99% interest rate (APR on a monthly base) for 36 months. If Mary uses the financing deal to purchase her car, how much does she pay each month?

(c) If the dealer is offering Mary a leasing deal of a monthly payment of $250 a month for 36 months without a down payment, which options is better? [hint: You cannot directly compare your answer from

(b) to $250 since the life spans that you own the car are different. To make it comparable, you need to assume that Mary will sell her car at the end of 36 month in the case of financing, and compute the present value of each option.]