Financing or Leasing a New Car. "New Dodge Ram 2500 4x4 Quad Cab:
Cash price $48,000." Suppose that Chrysler is also offering to provide 0% ?nancing for 48 months. Alternatively, you can lease the same vehicle for $600 per month for 48 months with $5,000 down. You have the $48,000 required and if you don't spend it on the truck, you can invest it in a GIC at 4%. The going rate for car loans is 8%.
(a) What is the monthly payment if you ?nance the car over 4 years at the following interest rates: 0%, 4%, and 8%?
(b) If you have the $48,000, what is the relevant interest rate? If you don't have the $48,000 but have to borrow it? If 4% is the cost of your
capital, what is the cost of the truck if you use Chrysler's ?nancing option? If 8% is the cost of your capital, what is the cost of the truck if you use Chrysler's ?nancing option?
(c) Given Chrysler's ?nancing option, which option (buying or leasing) is preferred? Why does it depend on the residual value of the truck when
the lease expires? Explain.
(d) Suppose that Chrysler terminates the ?nancing option. How high could it raise the lease payment to keep you indifferent between buying and leasing?