4 The lease versus purchase analysis Part 2 Which is better to lease or to buy A car buyer has two financing alternatives to lease or to purchase It is important to evaluate all the options and analyze the consequences of lease versus purchase decision The understanding of a comparative worksheet that analyzes the automobile lease versus purchase decision will help in making an informed choice How should a lease versus purchase analysis be conducted How can this worksheet be applied to help you or someone else make their financing decision Consider the following scenario Should Jake lease or purchase Jake is considering the purchase of a Porsche Boxster and has negotiated a final price of $48,100 Hes trying to decide whether to lease or purchase the vehicle If he leases, hell have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10 of the vehicles cost, and monthly payments of $652 over the four year term of the closed end lease The Porsche will have a residual value of $19,240 On the other hand, if he buys the Porsche, hell have to make a 10 down payment, pay sales tax equal to 8 of the vehicles price, and make monthly payments of $977 on a four year loan that charges 4 interest Be aware that funds used as down payments and security deposits incur an opportunity cost of 4 , as they could have earned interest for Jake over the period of the lease or loan Use the automobile lease versus purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase strategy for Jake To complete the worksheet, enter the appropriate values in their corresponding blanks (Note Round each value to the nearest whole dollar ) LEASE Item Description Amount ($) Initial Payment 1a Capital Cost Reduction $ 1b Security Deposit 1c Total Initial Payment 2 Number of Months in Lease 3 Monthly Lease Payment 4 Total Payments over Lease Term 5 Opportunity Cost of Initial Payment 6 Estimated End of Term Charges 0 00 7 Total Cost of Leasing $ PURCHASE Item Description Amount ($) 8 Purchase Price 9 Down Payment 10 Sales Tax on Purchase 11 Monthly Loan Payment 12 Total Payments over Term of Loan 13 Opportunity Cost of Down Payment 14 Estimated Vehicle Value at End of Loan 15 Total Cost of Purchase $ Based on this analysis, Jake should Use the lease to purchase the Porsche, because its total cost is greater than the total cost of a purchase transaction Use the lease to purchase the Porsche, because its total cost is less than the total cost of a loan transaction Use the loan to purchase the Porsche, because its total cost is less than the total cost of a lease transaction

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4. The lease versus purchase analysis - Part 2 Which is better: to lease or to buy? A car buyer has two financing alternatives: to

4. The lease versus purchase analysis - Part 2

Which is better: to lease or to buy?

A car buyer has two financing alternatives: to lease or to purchase. It is important to evaluate all the options and analyze the consequences of lease versus purchase decision. The understanding of a comparative worksheet that analyzes the automobile lease versus purchase decision will help in making an informed choice.

How should a lease-versus-purchase analysis be conducted? How can this worksheet be applied to help you or someone else make their financing decision? Consider the following scenario:

Should Jake lease or purchase?

Jake is considering the purchase of a Porsche Boxster and has negotiated a final price of $48,100. Hes trying to decide whether to lease or purchase the vehicle.

	If he leases, hell have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicles cost, and monthly payments of $652 over the four-year term of the closed-end lease. The Porsche will have a residual value of $19,240.
	On the other hand, if he buys the Porsche, hell have to make a 10% down payment, pay sales tax equal to 8% of the vehicles price, and make monthly payments of $977 on a four-year loan that charges 4% interest.
	Be aware that funds used as down payments and security deposits incur an opportunity cost of 4%, as they could have earned interest for Jake over the period of the lease or loan.

Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase strategy for Jake. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.)

LEASE

Item Description

Amount

($)

Initial Payment

1a.

Capital Cost Reduction

1b.

Security Deposit

1c.

Total Initial Payment

Number of Months in Lease

Monthly Lease Payment

Total Payments over Lease Term

Opportunity Cost of Initial Payment

Estimated End-of-Term Charges

0.00

Total Cost of Leasing

PURCHASE	Item Description	Amount
PURCHASE	Item Description	($)
8.	Purchase Price
9.	Down Payment
10.	Sales Tax on Purchase
11.	Monthly Loan Payment
12.	Total Payments over Term of Loan
13.	Opportunity Cost of Down Payment
14.	Estimated Vehicle Value at End of Loan
15.	Total Cost of Purchase	$ Based on this analysis, Jake should: Use the lease to purchase the Porsche, because its total cost is greater than the total cost of a purchase transaction. Use the lease to purchase the Porsche, because its total cost is less than the total cost of a loan transaction. Use the loan to purchase the Porsche, because its total cost is less than the total cost of a lease transaction.