Farrah and Sam Newton, a dual-income couple in their late 20s, want to replace their seven-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 $350 per month and a down payment of $2,000. 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 $245. 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 reevaluate their decision carefully.

3. Assume that the Newtons can get the following terms on a lease or a bank loan for the car, which

they could buy for $17,000. This amount includes tax, title, and license fees.

? Lease: 48 months, $245 monthly payment, 1 month?s payment required as a security deposit,

$350 end-of-lease charges; a residual value of $6,775 is the purchase option price at the end

of the lease.

? Loan:?$2,000 down payment, $15,000, 48-month loan at 5 percent interest requiring a

monthly payment of $345.44; assume that the car?s value at the end of 48 months will be the

same as the residual value and that sales tax is 6 percent.

The Newtons can currently earn interest of 3 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 5.1 to determine which deal is best for the Newtons.

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?

AUTOMOBILE LEASE VERSUS PURCHASE ANALYSIS* Date Sept. 6, 2017 Name Eleanor Clark Item Description LEASE 1 Initial payment: a. Down payment (capital cost reduction): b. Security deposit: 2 Term of lease and loan (years)* 3 Term of lease and loan (months) (Item 2 x 12) 4 5 6 $ 2,900.00 500.00 Monthly lease payment Total payments over term of lease (Item 3 x Item 4) Interest rate earned on savings (in decimal form) 10 Purchase price 11 Down payment 12 13 14 Monthly loan payment (Terms: 25,490.00, 48 months, 1 %) 15 Total payments over term of loan (Item 3 x Item 14) 16 Opportunity cost of down payment (Item 2 x Item 6 x Item 11) 17 Estimated value of car at end of loan 18 Sales tax rate (in decimal form) Sales tax (Item 10 x Item 12) 8 $ 7 Opportunity cost of initial payment (Item 1 x Item 2 x Item 6) S Payment/refund for market value adjustment at end of lease (SO for closed-end leases) and/or estimated end-of-term charges Total cost of leasing (Item 1a + Item 5 + Item 7 + Item 8) 9 PURCHASE Total cost of purchasing (Item 11 + Item 13 + Item 15 + Item 16 - Item 17) Amount $ 3,400.00 4 48 $ 440.00 $ 21,120.00 0.030 408.00 0.00 $ 24128.00 $ 29,990.00 $ 4,500.00 0.05 $ 1,499.50 S 575.54 $ 27,625.92 S 540.00 $ 16,500.00 $ 17,665.42 DECISION If the value of Item 9 is less than the value of Item 18, leasing is preferred; otherwise, the purchase alternative is preferred.