You plan to buy a 2017 Honda Accord this year. The MSRP (manufacturer's suggested retail price) is $22,455. According to Edmunds.com, it costs an estimated $4,834 per year to operate (including fuel, taxes, insurance, and maintenance) and is expected to depreciate to $10,527 after 5 years.
When you go to Ken Garff Honda on 9th South and State Street, the salesman tries to convince you to buy the hybrid model, which has an MSRP of $29,605 (32% more expensive). According to Edmunds.com, it only costs an estimated $2,354 per year to operate (mostly due to lower fuel consumption) and is expected to depreciate to $14,912 after 5 years.
(a) If you plan to sell the Accord after five years, how much more/less would it cost you to own the Hybrid? You plan to pay cash for the car. Assume an opportunity cost of capital of 3%.
(b) Another option that Ken Garff Honda offers on the Honda Accord (non-hybrid) is a lease with a down payment of $2,444 and payments of $277 per month for 3 years. At the end of the lease, you have the option to buy the Honda Accord for $13,500. What is the implied effective annual interest rate you would be paying for the lease? Is the implied effective annual rate is good or bad and why?