Question

General Motors advertised three alternatives for a 25-month lease on a new Tahoe: (1) zero dollars down and a lease payment of \(1,750 per month for 25 months, (2) \)5,000 down and \(1,500 per month for 25 months, or (3) \)38,500 down and no payments for 25 months. Use the present value Table B.3 in Appendix B to determine which is the best alternative for the customer (assume you have enough cash to accept any alternative and the annual interest rate is 12% compounded monthly).

Short answer

Thebest Alternative for the customer is Alternative (2), i.e., $5,000 down and $1,500 per month for 25 months.

Step-by-step solution

Meaning of Lease

An agreement in which the asset owner or lessor gives the lessee the right to use his assets for a particular period and, in return, get the payments is known as a lease.

Calculating the amount of cash outflow of alternative (1)

Zero dollars down and a lease payment of $1,750 per month for 25 months: -

$\begin{array}{c}\text{Amount\hspace{0.17em}of\hspace{0.17em}outflow}=0\times 1+\$1,750\times 22.0232\\ =0+\$1,750\times 22.0232\\ =\$38,541\end{array}$

Calculating the amount of cash outflow of alternative (2)

$5,000 down and $1,500 per month for 25 months: -

$\begin{array}{c}\text{Amount\hspace{0.17em}of\hspace{0.17em}outflow}=\$5000\times 1+\$1500\times 22.0232\\ =\$5000+\$1500\times 22.0232\\ =\$38,035\end{array}$

Calculating the amount of cash outflow of alternative (3)

$38,500 down and no payments for 25 months: -

$\begin{array}{c}\text{Amount\hspace{0.17em}of\hspace{0.17em}outflow}=\$38,500\times 1+\$0\times 22.0232\\ =\$38500+\$0\\ =\$38,500\end{array}$

Conclusion

On the evaluation of the above, Option 2 is Beneficial, i.e., $5,000 down and $1,500 per month for 25 months.