ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 23

refundable deposit, a $1600 refundable security deposit and
lease payments of $617 at the beginning of each month for 48 months.
Using a 9 percent annual required return to evaluate
the salvage value, what must the car be worth at the end of 48 months
for the purchase to be more attractive than the lease?
What is the indifference point? Hint-- You will need to find the cost
of own and the cost to lease – then you will need to run
a goal-seek or manually change the foregone salvage value to find the
foregone salvage value that sets the cost to lease
equal to the cost to own (by changing the salvage value).
First, it is important to discover the present value of money paid by
buying the car
Monthly Rate = 0.09/12 = 0.0075
Net Present Value = 2000 + 665 (1/1.0075 +1/1.0075^2
+...+1/1.0075^48)
= 2000 + 665 x (1/0.0075)[1 - (1/1.0075^48)] =
=
The value for buying at the end of 48 month assuming 9% =
= ____ x (1.0075)^48
=
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For the lease present value = 2000 +1600 + 617 x (1/0.0075)[1 -
(1/1.0075^48)]
=
Value of this lease at the end of 48 months = ____ x (1.0075^(48))
= 34,748.12
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Hence to find the minimum salvage value so that buying is more
attractive than leasing i.e. to find indifference point.
The value at the end of 48 months buy buying = The value at the end
of 48 months by leasing + Salvage value That is ____ = ____ +
Salvage value
As a result, the minimum salvage value
=
Salvage value more than this salvage value will make buying more