Should Mai Lease or Purchase?

Mai is considering the purchase of a Mini Cooper and has negotiated a final price of $23,450. She's trying to decide whether to lease or purchase the vehicle.

If she leases, she'll have to pay a $550 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $415 over the three-year term of the closed-end lease. The Mini Cooper will have a residual value of $9,380.On the other hand, if she buys the Mini Cooper, she'll have to make a 10% down payment, pay sales tax equal to 5% of the vehicle's price, and make monthly payments of $623 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 3%, as they could have earned interest for Mai over the period of the lease or loan.

Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase and then recommend the best strategy for Mai. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.)

AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS

LEASEItem DescriptionAmount($)Initial Payment1a.Capital Cost Reduction$1b.Security Deposit1c.Total Initial Payment2.Number of Months in Lease3.Monthly Lease Payment4.Total Payments over Lease Term5.Opportunity Cost of Initial Payment6.Estimated End-of-Term Charges0.007.Total Cost of Leasing$PURCHASE8.Purchase Price9.Down Payment10.Sales Tax on Purchase11.Monthly Loan Payment12.Total Payments over Term of Loan13.Opportunity Cost of Down Payment14.Estimated Vehicle Value at End of Loan15.Total Cost of Purchase$

Based on this analysis, Mai should:

Use the lease to purchase the Mini Cooper, because its total cost is less than the total cost of a loan transaction

Use the loan to purchase the Mini Cooper, because its total cost is less than the total cost of a lease transaction

Use the lease to purchase the Mini Cooper, because its total cost is greater than the total cost of a purchase transaction