Question

tim needs a new car while he attends college in the united states for the next three years. the car he would like has a msrp of $15,000. a local dealer can get him a 3-year loan with a 7% interest rate if tim can give them a $1,500 down payment.

the same dealer offers the same car to lease with a money factor of 0.00271 and a residual value of 75%. the lease requires an additional fee of $1,250 to cover tims security deposit and the acquisition and documentation fees for the car.

tim is looking to drive the car home with the smallest initial out-of-pocket cost. which of the following statements is true?
a. the initial out-of-pocket cost is less for the lease.
b. the initial out-of-pocket cost is less for the loan.
c. the initial out-of-pocket cost is the same for the lease and loan.
d. the initial out-of-pocket cost for a lease is not comparable to that of a loan.

please select the best answer from the choices provided

Explanation:

Identify initial cost for the loan

The loan option requires a down payment of \$1,500.

$$ \text{Initial Cost}_{\text{loan}} = \$1,500 $$

Identify initial cost for the lease

The lease option requires an additional fee of \$1,250 to cover the security deposit, acquisition, and documentation fees.

$$ \text{Initial Cost}_{\text{lease}} = \$1,250 $$

Compare the initial out-of-pocket costs

Comparing the two initial out-of-pocket costs:

$$ \$1,250 < \$1,500 \implies \text{Initial Cost}_{\text{lease}} < \text{Initial Cost}_{\text{loan}} $$

Thus, the initial out-of-pocket cost is less for the lease.

Answer:

• a. The initial out-of-pocket cost is less for the lease. (Correct answer)
• b. The initial out-of-pocket cost is less for the loan.
• c. The initial out-of-pocket cost is the same for the lease and loan.
• d. The initial out-of-pocket cost for a lease is not comparable to that of a loan.