Suppose You Are Considering Leasing a Car

question 31

Multiple Choice

Suppose you are considering leasing a car. The price you and the dealer agree on is $32,000, which is the base capitalized cost. Other costs added to the capitalized cost price include the acquisition fee, insurance, and, if elected, the extended warranty. Assume these costs are $390. Capitalization cost reductions include any down payment, trade-in value, or rebates. Assume you make a down payment of $2,600, and there is no trade-in or rebate. If you drive 11,000 miles per year, the lease-end residual value for this car will be $18,700 after three years. The lease factor, which is the interest rate on the loan, is the APR of the loan divided by 2,400. The lease factor the dealer quotes you is .00208. The monthly lease payment consists of three parts; a depreciation charge, a finance fee, and sales tax. The depreciation fee is the net capitalization cost minus the residual value, divided by the term of the lease. The net capitalization cost is the cost of the car minus any cost reductions plus any additional costs. The finance fee is the net capitalization cost plus the residual value, times the money factor, and the monthly sales tax is the depreciation charge plus the finance fee, times the tax rate. What is your monthly lease payment for a 36-month lease if the sales tax is 7 percent?

• A) $329
• B) $343
• C) $380
• D) $402
• E) $438

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Definitions:

Salvage Value

The estimated market valuation of an asset following the end of its useful duration.

Depreciation Expense

The charge to the income statement for a particular period that represents the allocation of the cost of tangible assets over their useful lives.

Depreciation Method

A systematic approach to allocating the cost of a tangible asset over its useful life, reflecting its consumption, wear and tear, or obsolescence.

Plant Asset

A long-term tangible asset held for manufacturing, production, or supply of goods and services, such as machinery and buildings.