5. Individual Problems 19-1In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufadurer for a set term, y twsyears, and then have the option of keeping the car IF the customer decided to keep the car, the customer would pay a price to the mandfacturer, the"residual value," computed as 60% of the new car price. The manufacturer would then sell the returned cers at Puction. In 1999, manuacturers loan average of $480 on each returned car (the auction price was, on average, s480 less than the residual value).Suppose two customers have leased cars from a manufacturer. Their lease agreements are ud, and they are considering whether to e (andpurchase at 60% of the new car price) their cars or return their Cars. Two years ago, Mara leased a car valued new at s17,500. 7 he returne the cathe manufacturer could likely get s12,250 at auction for the car Simone also leased a cac valued new at $17,500, two years age f she returns thecar, the manufacturer could likely get $8.925 at auction for the carUse the following table to indicate whether each buyer more likely to purchase or return the car.BuyerKeep and Purchase CarReturn CarMariaSimonevreturns the car instead of keepng andThe manufacturer will lose money (at auction, ei tetheresidual value of the car) ifpurchasing it.car would help attenuate the problems of adverse selectionTrue or False: Setting a more accurate redTrueFalse

Maria will keep the car as its worth is more than residual value (17500 ×60%=10,500) Simone will…

se late 1990s, car leasing was very popular in the Uni and then have the option of keeping the car. f the dual value," computed as 60% of the new car price. rerage of $480 on each returned car (the auction prie pse two customers have leased cars from a manufac ase at 60% of the new car price) their cars or returm

se late 1990s, car leasing was very popular in the Uni and then have the option of keeping the car. f the dual value," computed as 60% of the new car price. rerage of $480 on each returned car (the auction prie pse two customers have leased cars from a manufac ase at 60% of the new car price) their cars or returm

PFIN (with PFIN Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)

6th Edition

ISBN:9781337117005

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter5: Making Automobile And Housing Decisions

Section: Chapter Questions

Problem 2FPE: Lease ersus purchase car decision. use wor sheet 5.1. Everett Adams is trying to decide whether to...

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Assume you work for a company that leases cars. An auto dealership contacts you and tells you that it has a customer that wants to lease a car and can arrange for your company to purchase the vehicle and then lease it to the customer. Note that an important variable for you as a leasing firm is the “residual value” of the vehicle when the lease matures and you as the leasing firm must sell the vehicle. It must be forecast and as a result is the source of much of the risk in the lease. The customer that they have has sufficient credit and wants to lease a $42,000 vehicle for 4 years with monthly payments. Your competitor is a leasing company that offers leases for the vehicle requiring the customer to have a down payment of $4,000 and monthly lease payments of $575 beginning when the lease is signed. So at the signing, the customer must pay $4,575. If your firm meets the competitors’ terms, what must the residual value be at the end of the lease in 4 years for your firm to earn 9%…
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Using the attached exhibit and the information below, what is the net cost of purchasing this vehicle?To answer the question, use the following assumptions:● The price of the car is $20,000.● The down payment required is $2,000● The security deposit required is $500● The sales tax rate is 10.25%%. Round to the nearest cent. DO NOT INCLUDE COMMAS OR $.● GAP insurance on the lease is $300�� Interest lost or foregone is computed using a 4% after tax rate of return (use in Step 4)● The interest rate on the lease and loan is 9% (use in Step 6).● The lease and loan terms are both 36 months.● Your resale/trade-in value for your vehicle is $6,000● Disposition fee: $250● Lease Payment: $325/ month● Purchase Payment: $360/month
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