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 Samantha Lease or Purchase? Samantha is considering the purchase of a Toyota Camry and has negotiated a final price of $17,950. She's trying to decide whether to lease or purchase the vehicle. If she leases, she'll have to pay a $600 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $318 over the three-year term of the closed-end lease. The Camry will have a residual value of $7,180. . On the other hand, if she buys the Camry, she'll have to make a 10% down payment, pay sales tax equal to 7% of the vehicle's price, and make monthly payments of $477 on a three-year loan that charges 4% interest. Be aware that funds used as down payments and security deposits incur an opportunity cost of 4%, as they could have earned interest for Samantha over the period of the lease or loan. Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase and then recommend the best strategy for Samantha. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS Amount ($) LEASE 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 0.00 PURCHASE 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 Based on this analysis, Samantha should: O Use the lease to purchase the Camry, because its total cost is greater than the total cost of a purchase transaction Use the lease to purchase the Camry, because its total cost is less than the total cost of a loan transaction O Use the loan to purchase the Camry, because its total cost is less than the total cost of a lease transaction