Should Raphael lease or purchase? Raphael is considering the purchase of a Ford F-150 Pickup and has negotiated a final price of $27,690. He's trying to decide whether to lease or purchase the vehicle. If he leases, he'll have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $375 over the four-year term of the closed-end lease. The truck will have a residual value of $11,076. On the other hand, if he buys the truck, he'll have to make a 10% down payment, pay sales tax equal to 7% of the vehicle's price, and make monthly payments of $563 on a four-year loan that charges 4% interest. Be aware that funds used as down payments and security deposits incur an opportunity cost of 5%, as they could have earned interest for Raphael over the period of the lease or loan. LEASE Item Description 1c. 2. 3. 1a. 1b. Initial Payment Capital Cost Reduction Security Deposit Total Initial Payment Number of Months in Lease Monthly Lease Payment 4. Total Payments over Lease Term 5. Opportunity Cost of Initial Payment 6. Estimated End-of-Term Charges 7. Total Cost of Leasing Amount ($) 0.00 Amount PURCHASE Item Description ($) 8. Purchase Price 9. Down Payment 10. 11. 12. 13. 14. 15. Sales Tax on Purchase Monthly Loan Payment Total Payments over Term of Loan Opportunity Cost of Down Payment Estimated Vehicle Value at End of Loan Total Cost of Purchase PURCHASE Item Description 8. Purchase Price 9. Down Payment 10. Sales Tax on Purchase 11. Monthly Loan Payment 12. Amount ($) 13. 14. 15. Total Payments over Term of Loan Opportunity Cost of Down Payment Estimated Vehicle Value at End of Loan Total Cost of Purchase Based on this analysis, Raphael should: Use the lease to purchase the truck, because its total cost is less than the total cost of a loan transaction. Use the loan to purchase the truck, because its total cost is less than the total cost of a lease transaction. Use the lease to purchase the truck, because its total cost is greater than the total cost of a purchase transaction.