W988AMMT.3

3.You graduate and land that big job. It's Porsche Boxster time! You are negotiating with the dealer and you are trying to decide whether to buy or lease. He presents you with a 4 year lease: interest rate is 7% compounded monthly, purchase price is $40,000, buyout price is $25,000. What this means is that you are essentially borrowing $40,000, which you will repay in 48 equal monthly installments plus one lump payment at the end equal to $25,000 (or you just return the car, which they figure will be worth $25,000). He claims that based on these figures, your lease payment will be $530.

1. Is he telling the truth or is he overcharging you? EXPLAIN. (8 pts.)
2. Assuming that the purchase price and the buyout are correct, is he actually charging you a higher or lower interest rate? How can you tell? (5 pts.)

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