Problem 123 Amy Lloyd is interested in leasing a new Honda a

Problem 12-3

Amy Lloyd is interested in leasing a new Honda and has contacted three automobile dealers for pricing information. Each dealer offered Amy a closed-end 36-month lease with no down payment due at the time of signing. Each lease includes a monthly charge and a mileage allowance. Additional miles receive a surcharge on a per-mile basis. The monthly lease cost, the mileage allowance, and the cost for additional miles follow:

Amy decided to choose the lease option that will minimize her total 36-month cost. The difficulty is that Amy is not sure how many miles she will drive over the next three years. For purposes of this decision, she believes it is reasonable to assume that she will drive 12,000 miles per year, 15,000 miles per year, or 18,000 miles per year. With this assumption Amy estimated her total costs for the three lease options. For example, she figures that the Hepburn Honda lease will cost her 36($299) + $0.15(36000 - 36000) = $10,764 if she drives 12,000 miles per year, 36($299) + $0.15(45000 - 36000) = $12,114 if she drives 15,000 miles per year, or 36($299) + $0.15(54000 - 36000) = $13,464 if she drives 18,000 miles per year.

Solution

(a) The decision is to select the best lease option and the chance event is the monthly cost.

(b) Payoff Matrix in $

Dealer Actutal Miles Driven

36000 45000 54000   

Hep Honda 10764 12114 13464

Midtown 11160 12960 14760

Hopkins 11700 13050 14400

(c) From the payoff matrix, the least payment to be made is $10764 and Amy should take it.