Chapter $5$

Critical Thinking Case $1$

The Newtons' New Car Decision: Lease versus Purchase

Farrah and Sam Newton, a dual$-$income couple in their late $20$s$,$ want to replace their $7-$year$-$old car, which has $90,000$ miles on it and needs some expensive repairs.

After reviewing their budget, the Newtons conclude that they can afford auto payments of not more than $$320$ per month and a down payment of $$1,500.$ They

enthusiastically decide to visit a local dealer after reading its newspaper ad offering a closed$-$end lease on a new car for a monthly payment of $$320.$ After visiting witl

the dealer, test$-$driving the car, and discussing the lease terms with the salesperson, they remain excited about leasing the car but decide to wait until the following

day to finalize the deal. Later that day the Newtons begin to question their approach to the new car acquisition process and decide to carefully reevaluate their

decision.

What are some basic purchasing guidelines that the Newtons should consider when choosing which new car to buy or lease? How can they find the

information they need?

How would you advise the Newtons to research the lease$-$versus$-$purchase decision before visiting the dealer? What are the advantages and disadvantages $c$

each alternative? Assume that the Newtons can get the following terms on a lease or a bank loan for the car, which they could buy for $$15,000.$ This amount includes tax, $t$

and license fees.

Lease: $48$ months, $$320$ monthly payment, $1$ month's payment required as a security deposit, $$400$ end$-$of$-$lease charges; a residual value of $$6,720$ is the

purchase option price at the end of the lease.

Loan: $$1,500$ down payment, $$13,500,48-$month loan at $5$ percent interest requiring a monthly payment of $$310\mathrm{.}90$; assume that the car's value at the end

$48$ months will be the same as the residual value and that sales tax is $6$ percent.

The Newtons can currently earn interest of $4$ percent annually on their savings. They expect to drive about the same number of miles per year as they do now.

a$.$ Use the format given in Worksheet $5\mathrm{.}1$ to determine which deal is best for the Newtons. Round the answers to the nearest cent.

Total cost of leasing $

Total cost of purchasing $

b$.$ What other costs and terms of the lease option might affect their decision?

c$.$ Based on the available information, should the Newtons lease or purchase the car?

Why?Farrah and Sam Newton, a dual$-$income couple in their late $20$s$,$ want to replace their $7-$year$-$old car, which has $90,000$ miles on it and needs some expensive repairs. After reviewing their budget, the Newtons conclude that they can afford auto payments of not more than $$320$ per month and a down payment of $$1,500.$ They enthusiastically decide to visit a local dealer after reading its newspaper ad offering a closed$-$end lease on a new car for a monthly payment of $$320.$ After visiting with the dealer, test$-$driving the car, and discussing the lease terms with the salesperson, they remain excited about leasing the car but decide to wait until the following day to finalize the deal. Later that day the Newtons begin to question their approach to the new car acquisition process and decide to carefully reevaluate their decision.