Lease versus purchase car decision. Use Worksheet 5.1. Ben Hall is trying to decide whether to lease or purchase a new car costing $18,000. If he leases, he'll have to pay a $600 security deposit and monthly payments of $450 over the 36-month term of the closed-end lease. Ben could earn 1% on the amount of any down payment or security deposit. On the other hand, if he buys the car, then he'll have to make a $2,400 down payment and will finance the balance with a 4% interest rate. He'll also have to pay a 6% sales tax ($1,080) on the purchase price, and he expects the car to have a residual value of $6,500 at the end of three years. Use the automobile lease versus purchase analysis form in worksheet 5.1 to find the total cost of both the lease and the purchase, and then recommend the best strategy for Ben.

AUTOMOBILE LEASE VERSUS PURCHASE ANALYSIS Date September 4, 2020 Name Amount 2 0 4 $ $ Item Description LEASE 1 Initial payment: a. Down payment (capiti $ cost reduction) b. Security deposit: Term of lease and loan (years)* 3 Term of lease and loan (months) (Item 2x 1 Monthly lease payment 5 Total payments over term of lease (Item 3 x Item 4) Interest rate earned on savings (in decimal 7 Opportunity cost of initial payment (Item 1 x Item 2x Item 6) Payment/refund for market value adjustmen at end of lease (50 for closed-end leases) a estimated end-of-term charges Total cost of leasing (Item la + Item 5 + Item 7 + Item 8) PURCHASE Purchase price 6 $ 8 $ 9 10 $ 11 Down payment $ 12 13 $ 14 $ 15 16 $ Sales tax rate (in decimal form) Sales tax (Item 10 x Item 12) Monthly loan payment (Terms: 0.00 0 months, 1%) Total payments over term of loan (Item 3 x Item 14) $ Opportunity cost of down payment (Item 2x Item 6 x Item 11) Estimated value of car at end of loan $ Total cost of purchasing (Item 11 + Item 13 + Item 15 + Item 16 - Item 17) DECISION If the value of Item 9 is less than the value of Item 18, leasing is preferred; otherwise the purchase alternative is preferred. *Note: This form is based on assumed equal terms for the lease and the installment loan, which is assumed to be used to finance the purchase. 17 18 $