Automobiles Are Often Leased, and Several Terms Are Unique to Auto

question 4

Multiple Choice

Automobiles are often leased, and several terms are unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $32,000. This is the base capitalized cost. Other costs added to the capitalized cost price include the acquisition (bank) fee, insurance, or extended warranty. Assume these costs are $390. Capitalization cost reductions include any down payment, credit of trade-in, or dealer rebate. 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. (We're not really sure where the 2,400 comes from, either.) The lease factor the dealer quotes you is 0.00208. The monthly lease payment consists of three parts; a depreciation fee, 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, times the money factor, and the monthly sales tax is simply the monthly lease payments times the tax rate. What is your monthly lease payment for a 36-month lease if the sales tax is 8 percent?

• A)$329.08
• B)$342.63
• C)$379.82
• D)$402.24
• E)$441.63

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