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 Sam lease or purchase? Sam is considering the purchase of a Volvo C70 and has negotiated a final price of $39,950. He's trying to decide whether to lease or purchase the vehicle. If he leases, he'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 $708 over the three-year term of the closed-end lease. The Volvo will have a residual value of $15,980. On the other hand, if he buys the Volvo, he'll have to make a 10% down payment, pay sales tax equal to 6% of the vehicle's price, and make monthly payments of $1,062 on a three-year loan that charges 4% interest. Be aware that funds used as down payments and security deposits incur an opportunity cost of 5%, as they could have earned interest for Sam over the period of the lease or loan. Amount LEASE Item Description ($) Initial Payment 1a. Capital Cost Reduction $ 1b. Security Deposit 1c. Total Initial Payment 2. Number of Months in Lease 3. Monthly Lease Payment 4. Total Payments over Lease Term 5. Opportunity Cost of Initial Payment 6. Estimated End-of-Term Charges 0.00 7. Total Cost of Leasing Amount ($) PURCHASE Item Description 8. Purchase Price 9. Down Payment 10. Sales Tax on Purchase 11. Monthly Loan Payment 12. Total Payments over Term of Loan 13. Opportunity Cost of Down Payment 14. Estimated Vehicle Value at End of Loan 15. Total Cost of Purchase Based on this analysis, Sam should: Use the lease to purchase the Volvo, because its total cost is less than the total cost of a loan transaction. Use the lease to purchase the Volvo, because its total cost is greater than the total cost of a purchase transaction. O Use the loan to purchase the Volvo, because its total cost is less than the total cost of a lease transaction