Incremental rate of return analysis

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Reference no: EM131809105

The Financial Advisor is a weekly column in the local newspaper. Assume you must answer the following question. "I need a new car that I will keep for 5 years. I have three options. I can (A) pay $19,999 now, (B) make monthly payments for a 6% 5-year loan with 0% down, or (C) make lease payments of $299.00 per month for the next 5 years. The lease option also requires an up-front payment of $1000. What should I do?" Assume that the number of miles driven matches the assumptions for the lease, and the vehicle's value after 5 years is $6500. Remember that lease payments are made at the beginning of the month, and the salvage value is received only if you own the vehicle.

(a) Develop a choice table for nominal interest rates from 0% to 50%. (You do not know what the reader's interest rate is.)

(b) If i = 9%, use an incremental rate of return analysis to recommend which option should bechosen.

Reference no: EM131809105

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