Assume you have decided you need a new car and you've determined you want a Toyota Corolla which is currently selling for $26,000. The alternatives available to you are: 1) buy the car for cash, perhaps borrowing the money needed from your bank; 2) lease the car from the dealer for 4 years. If you decide to buy the car, you can borrow the required $26,000 from your bank via a 4 year amortizing loan that requires you to make 4 annual payments which incorporate an interest rate = 12% per year. This means the annual payment to the bank beginning 1 year from today = $8,560.

If you sell the car at the end of 4 years you estimate you will receive $14,000. Since this car would be bought for personal use, there is no depreciation expense to consider and there are no interest tax shields from the bank loan, and there are no tax consequences from the hypothetical sale of the car at the end of 4 years (the sale price is estimated to be at the then-current fair market value). You are responsible for maintenance of the car, which you estimate will cost you $500 per year.

If you decide to lease the car the dealer requires an immediate payment of 10% of the purchase price, I.e., $2,600. After that you would pay 4 annual lease payments, starting immediately, of $4,000 per year.

Note: maintenance is covered in the lease payments.

Hint: because the car is for personal and not business use, the data for many of the lines in the spreadsheet will be zero.

Should you lease or buy the car?