Andy McLaren is considering buying a new VW Jetta Sedan with a manufacturer’s suggested retail price (MSRP) of $28,000 and a residual value of $18,000 at the end of 3 years. The car dealership offered him a lease agreement as an alternative to a purchase. The lease agreement stipulates a capital payment of 10% of MSRP and a security deposit of $250 to be paid immediately, along with monthly payments of $585. The purchase contract specifies a down payment of $3,500, sales tax of 6.5%, and monthly payments of $775 for 3 years. Andy earns 5.5% interest on his short-term investments. Ignore the time value of money.
a. What is the total cost of leasing?
b. What is the total cost of purchasing?
c. Should Andy lease or buy the new vehicle? Explain you answer.