5. 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 Mika Lease or Purchase?

Mika is considering the purchase of a Ford Escape Hybrid and has negotiated a final price of $30,570. Shes trying to decide whether to lease or purchase the vehicle.

	If she leases, shell have to pay a $550 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicles cost, and monthly payments of $542 over the three-year term of the closed-end lease. The Escape will have a residual value of $12,228.
	On the other hand, if she buys the Escape, shell have to make a 10% down payment, pay sales tax equal to 7% of the vehicles price, and make monthly payments of $812 on a three-year loan that charges 4% interest.
	Be aware that funds used as down payments and security deposits incur an opportunity cost of 3%, as they could have earned interest for Mika 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 and then recommend the best strategy for Mika. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.)

AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS

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
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, Mika should:

Use the lease to purchase the Escape, because its total cost is greater than the total cost of a purchase transaction

Use the lease to purchase the Escape, because its total cost is less than the total cost of a loan transaction

Use the loan to purchase the Escape, because its total cost is less than the total cost of a lease transaction