213.3

3.You graduate and land that big job. It's time to treat yourself to a nice car! 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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