Buy or Lease
An $18,000 car will have a scrap value of $500, 9 years from the date of purchase.

a) Using the constant-percentage depreciation method, find the book value of the car at the end of 4 years.

b) If money can be invested at j12 = 6%, what is the monthly sinking-fund deposit necessary to replace the car if it is sold for its book value in (a) after 4 years and the price of new cars has increased at an annual rate of j1 = 5%?


c) An identical car can be leased for 4 years at a cost of $405 paid at the beginning of each month. The contract calls for the driver to pay for fuel, repairs, licenses and maintenance (but not for insurance). If the car is bought, there will a cost of $800 at the time of the purchase for 1 year’s insurance, with insurance costs increasing by 4% at the beginning of each of the next 3 years. Still using j12 = 6%, determine whether it is more economical to buy of lease the car over a 4-year period. Assume that it can be sold for the book value found in a) if you buy the car.