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 Shiloh Lease or Purchase? Shiloh is considering the purchase of a Toyota Prius and has negotiated a final price of $19,895. He's trying to decide whether to lease or purchase the vehicle. . If he leases, he'll have to pay a $550 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $352 over the three-year term of the closed-end lease. The Prius will have a residual value of $7.958. . On the other hand, if he buys the Prius, he'll have to make a 10% down payment, pay sales tax equal to 7% of the vehicle's price, and make monthly payments of $529 on a three-year loan that charges 4% interest. Be aware that funds used as down payments and security deposits incur an opportunity cost of 5%, as they could have earned interest for Shiloh over the period of the lease or loan. Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase and then recommend the best strategy for Shiloh. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar) Amount ($) LEASE 1a. $ 1b. 1c. 2. Item Description Initial Payment Capital Cost Reduction Security Deposit 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 Total Cost of Leasing 3. 4. 5. 6. 0.00 7. PURCHASE 8. 9. 10. Purchase Price Down Payment Sales Tax on Purchase Monthly Loan Payment Total Payments over Term of Loan Opportunity Cost of Down Payment Estimated Vehicle Value at End of Loan Total Cost of Purchase INI 11. 12. 13. 14. 15. $ Based on this analysis, Shiloh should: Use the loan to purchase the Prius, because its total cost is less than the total cost of a lease transaction Use the lease to purchase the Prius, because its total cost is greater than the total cost of a purchase transaction Use the lease to purchase the Prius, because its total cost is less than the total cost of a loan transaction