You Are Planning to Lease an Automobile for 36 Months

Essay

You are planning to lease an automobile for 36 months from a local dealer. The negotiated price is $20,000. The
required security deposit is $500 at the time of the lease and will be refunded in full at the end of the lease. The
monthly lease payable at the end of each month is calculated to be $300. The dealer will depreciate the asset
over five years with a salvage value of 10% of the original purchase price. What kind of residual value (salvage
value) was assumed by the dealer in calculating the monthly lease? The dealer's after-tax interest rate is known
to be 9%, compounded monthly. Assume that the dealer's tax rate is 35%.