You are currently thinking of leasing an apartment. The current lease rates quoted by the lessor on the lease contracts of $1000 is $18 per month and $12.50 per month for 3-year and 5-year terms respectively. While the monthly lease rentals on the 3-year contract are payable in arrears, those for the 5-year contract are payable in advance (Assuming 10 percent marginal cost of debt to the lessee)
Aside from leasing an apartment, you are also thinking of a hire purchase plan for your car. The plan requires you to pay $91.68 per month in arrear over a 12 month period. Assuming the purchase price of the car is $1000 and there is no salvage value at the end of the life.
a) Calculate the present values of the lease payments for both contracts.
b) Referring to part (a) of the question, decide the lease contract that you will chose Provide explanations.
c) Compute the effective rate of interest implied by the hire purchase plan.
d) Develop the repayment schedule from the viewpoint of the hirer (Refer table below)
e) Since you are also contemplating to buy a used car, calculate the effective and nominal rates of interest per annum for the hire purchase plan.
f) If you are currently earning $300 a month, discuss whether it is more feasible to stay with your parent and take public transportation or to lease and purchase a car (Indicate at least THREE reasons)