(130 Points)
Q1. A friend of mine is graduating soon. She accepted a job offer where she will be living away
from her family for the next couple of years. She is in the market looking for a new car and she
needs your help in order to decide whether to buy or lease. Since she does not know yet if she is
going to stay in the new job or not, she wants a short term commitment, two to three years.
She is currently looking at the 2018 Toyota Corolla. Based on the following information and the
fact that her opportunity cost is 6%, your recommendation to buy or lease is needed if the decision
is over two or three years. A detailed and complete analysis is required to support your claims.
New 2018 Corolla LE Lease Γ’ΒΒ
$179 per Month / 36 Months / $2,878 Due at Signing
OFFER DETAILS
For well-qualified lessees with approved credit through Southeast Toyota Finance. Not all
lessees will qualify for this payment amount. Closed-end lease on new 2018 Corolla LE model #
1852 with automatic transmission and select equipment. Adding options increases payment.
$179.00 per month for 36 months. $2,878 due at signing includes $2,699 down payment and first
month's payment. No security deposit required. $17,582 Adjusted Capitalized Cost is based on
down payment; excludes tax, tag, registration, title and dealer fees. Dealer fees vary by dealer.
Monthly payments do not include applicable taxes. Lessee pays the remainder of maintenance
after ToyotaCare expires, excess wear and use, and $0.18 per mile over 12,000 miles per year.
Lease payments total $6,444. Disposition Fee of $350 due at lease-end. May not be combined
with certain other offers. Must take delivery between 06/05/18 and 07/09/18.
Assume that the same offer details above apply for 36 month lease and the mileage limit is 36,000
miles, but she wonΓ’ΒΒt go above the mileage limit.
The MSRP for New 2018 Corolla LE is $20,897 (do not worry about taxes). She applied for an
auto loan and was able to get 1.99% APR compounded monthly for 24 or 36 months. Auto loan
payments are due the end of the month, while lease payments are due the first day of each month.
No down payment required to purchase the car.
COST TO OWN A 2018 TOYOTA COROLLA State:
Miles Driven Annually: 12,000
Cost to Own Breakdown Year by
Year: Year 1 Year 2 Year 3 Year 4 Year 5 Total
Depreciation $4,675 $1,235 $1,164 $1,038 $889 $9,002
Maintenance $0 $0 $135 $111 $812 $1,057
Repairs $0 $0 $0 $706 $918 $1,625
Every new vehicle purchased or leased includes complementary maintenance and roadside
assistance for 2 years or 25,000 miles.
Based on the KBB, the following will be the fair value of the car for different parties in 24-month
and 36-month.
In 24-Month In 36-Month
Retail Value $15,518 $14,967
Trade-In $12,418 $11,967
Private Value $13,518 $13,017
Note: The dealership will sell you a used car at the Retail Value, but buy it from you at the Trade-
In value. If you decided to sell your car by yourself to a private party, you will receive the private
value.
Hint: The main goal of this project is to see whether you understand the concept of Time Value of
Money (TVM), we covered in Chapter 4. TVM is the most important principle in the world of
finance, and I have to make sure you understand that money has different values over time
depending on the required interest rate. In other words, it is not simply adding or subtracting
numbers (a dollar today is not equivalent to a dollar tomorrow). Therefore, you need to create a
time line for each option, buy vs. lease, and for each period, 24 vs. 36 mo. On this time line, you
have to include all projected monthly payments based on the provided information. Once you have
all the payments on your time line, you can now discount them (calculate the present value) back
to period t=0 and compare your options. Feel free to use spreadsheets if you like to do it this way.
Finally, before you email or call me with your questions, you need to review Ch. 4 carefully. I may
give hints, but I will NOT solve the project for you!
- A detailed and complete analysis for the problem is required. Excel spreadsheets,
