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 Subject: Finance Category: Business and Money > Finance Asked by: baseball2-ga List Price: \$7.00 Posted: 26 Jul 2005 16:42 PDT Expires: 25 Aug 2005 16:42 PDT Question ID: 548277
 ```Need formula to determine the following: I could buy a car for 25,000 and sell it in 5 years for 5,000. Or I can lease the car for 5 years for 5,000 per a year. The discount rate is per year. Would the formula for the sell portion of the question be 5000/1.12= 4.464.29 25,000- 4,464.29 = 20,535.71? Would the formula for the lease portion of the care be 5,000/1.12 + 5000/(1.12)^2 + 5,000/(1.12)^3+ 5.000/ (1.12)^4 + 5.000/ (1.12)^5 = 18, 559.71 Therfore buying a car would be a better option?```
 ```Baseball2 ? Early in my finance career, I did virtually the same calculation ? the difference being that we could depreciate the car or take the lease payments as straight expense. We decided to lease because the IRR was so low that it was lower than our corporate cost-of-money. Okay, with that side story aside, let?s go through the PURCHASE and LEASE options and their discounted cash flow. BTW, you have set the problem up correctly ? except for the fact that leases are generally paid IN ADVANCE ? so year 1 lease is \$5,000/1 and year 2 is \$5,000/1.12, etc. But first let?s do every year?s NPV factor before figuring the discounted cash flow (DCF) for each option: NPV FACTOR: Year 0: 1 Year 1: 1/1.12 = 0.8929 Year 2: 1/(1.12)^2 = 0.7972 Year 3: 1/(1.12)^3 = 0.7118 Year 4: 1/(1.12)^4 = 0.6355 Year 5: 1/(1.12)^5 = 0.5674 DCF of PURCHASE Year 0: -\$25,000 Year 5: +\$5,000 * 0.5674 = \$2,337 =========================== DCF of PURCHASE = - \$22,663 =========================== DCF of LEASE Year 0: -\$5,000 Year 1: -\$5,000 * 0.8929 = -\$4,465 Year 2: -\$5,000 * 0.7972 = -\$3,986 Year 3: -\$5,000 * 0.7118 = -\$3,559 Year 4: -\$5,000 * 0.6355 = -\$3,178 ======================== DCF of LEASE = -\$20,188 ======================== As in the case of my analysis, the lease has a smaller negative number and is more attractive. However, note that this example excludes any tax impact. Best regards, Omnivorous-GA```
 baseball2-ga rated this answer: `Once again, thank you for the excellent help!`