To travel to her new job, Dharshana required a car. Reading the newspaper, she noticed an ad for an Acura TSX. It was just the vehicle she wanted.
The ad quoted both a cash purchase price of $37 500 and a monthly lease payment option. Since she did not have enough money to pay for a car, she would have to finance it from Honda by paying interest of 7.8% compounded monthly on the loan.
The lease option required payments of $594 a month for 48 months with a $1330 down payment or equivalent trade. Freight and air tax was included. Dharshana did not have a vehicle to offer as a trade-in. If the vehicle was leased, then after 48 months it could be purchased for $16 155. The lease was based on a finance interest rate of 3.8%. During the term of the lease, kilometers were limited to 24 000 per year, with an additional charge of $0.08 per kilometer for excess kilometers. The costs included freight, but excluded taxes, registration, license, and dealer administration charges. Dharshana was particularly impressed with the “four years or 100 000 kilometer” warranty on the engine and transmission. The manufacturer also offered 24-hour roadside assistance.
Dharshana must decide whether to buy or lease this car. She lives in a province with a 13% HST tax rate. She realizes that the costs of license and insurance must be paid, but she will ignore these in her calculations.
QUESTIONS
1. If Dharshana buys the car, what is the total purchase price, including taxes?
2. Since Dharshana has no down payment, she must finance the car if she purchases it.
(a) Is it cheaper to borrow the money from Honda or to lease?
(b) The bank is offering a vehicle loan rate of 8% compounded annually. Is it better to buy or to lease the car at this rate?
3. Suppose Dharshana has a $4000 down payment for this car.
(a) What is the purchase price of the car if she pays cash for it? Assume the down payment is subtracted from the price of the car including tax.
(b) If the monthly lease payment is $594, is it cheaper to lease or buy the car if Dharshana can get the special dealer rate of 3.8%?