Mercedes Benz wants to buy a new car that will cost $130,000. She is trying to decide whether to lease it for 3 years or to buy it and finance the purchase with a 3-year installment loan. The lease would require no down payment and would last for 3 years. The lease payments are $1800 per month starting at the end of the month and the installment loan will require monthly payments starting a month from now at an annual percentage rate (APR) of 6%.
a. If Mercedes expects the resale value of the car to be $90,000 3 years from now, should she buy or lease it?
b. What is the break-even resale price of the car 3 years from now, such that Mercedes would be indifferent between buying and leasing it?