A new car valued at $23,500 is to be leased for 3 years. The lessee has the option to purchase the car for $17,500 at the end of the leasing period. What monthly payments, with one payment in advance, are necessary to yield the lessor 14% compounded annually? Calculate the payments from the lessor’s point of view. Thanks for any help.
This financial calculation can be done in a number of ways. The easiest way to solve it is to use a TVM formula to calculate the payment directly:
Since they want monthly payments, we have to convert 14% comp. annually to comp. monthly, which comes to=13.1746223402/12=1.09788519502 per month.
The formula in question for this particular problem is:
-P*[(1-(1+R/100)^-N)/(R/100)]+FV*(1+(R/100))^-N-PV=0, Where R=Interest rate per period, N=number of periods, P=periodic payment, PV=Present value, FV=Future value.
By substituting in the above equation, we solve directly for P=payment.
-P*[(1-(1+.0109788519502)^-36)/(.0109788519502)]+17,500*(1+(.0109788519502))^-36-23,500=0
Using Wolfram/Alpha engine to expedite caculation, it gives P=$394.80, which is at the end of month:
We simply divide it by 1.0109788519502 to get =$390.51 for the beginning of the month.
P.S. I have calculated it in two other ways and they all agree.