What is the effective interest rate on a lease for a $170,000 truck with $0 down, $4,000 monthly payment over 5 years, and $1 buy-out option at the end?

To determine the **effective interest rate** on a lease, we need to calculate the internal rate of return (IRR) on the cash flows involved in the lease. Here’s how the process works step by step:

### Problem Summary:
- **Truck Price**: $170,000
- **Down Payment**: $0
- **Monthly Payment**: $4,000
- **Lease Term**: 5 years (60 months)
- **Buy-out Option**: $1 at the end of the lease

### Cash Flows:
- **Initial outflow (at time 0)**: The truck's price is $170,000, but no down payment is made, so this will be $0.
- **Monthly outflows**: Each month for 5 years, you pay $4,000. Thus, for 60 months, you pay $4,000/month.
- **Final outflow (at month 60)**: There’s a $1 buy-out option at the end of the lease.

### Objective:
We are looking for the effective interest rate that equates these cash flows to the truck's value.

I will now compute the IRR using these values.The **effective annual interest rate** on the lease is approximately **15.51%**.

Would you like more details on how this was calculated, or any other questions? Here are some related questions you might explore:

1. How does the effective interest rate compare to the nominal interest rate?
2. What factors impact the lease interest rate in a vehicle lease?
3. How would the interest rate change if a down payment were included?
4. What would the total cost of the lease be over the 5-year period?
5. How is the internal rate of return (IRR) related to lease payments?

**Tip**: Understanding the IRR can help you evaluate different financing options, as it reflects the true cost of borrowing.

Discover how to calculate the effective interest rate on a $170,000 truck lease with $0 down, $4,000 monthly payments over 5 years, and a $1 buy-out option at the end. This solution uses the internal rate of return (IRR) formula to determine a rate of 15.51%. Suitable for finance students and professionals.

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