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Should Eli Lease or Purchase? Eli is considering the purchase of a Ford Fiesta and has negotiated a final price of $13,580. He's trying to decide whether to lease or purchase the vehicle. If he leases, he'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 $241 over the three-year term of the closed-end lease. The Fiesta will have a residual value of $5,432. On the other hand, if he buys the Fiesta, he'll have to make a 10% down payment, pay sales tax equal to 5% of the vehicle's price, and make monthly payments of $361 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 Eli 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 Eli. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) Amount AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS LEASE Item Description Initial Payment Capital Cost Reduction Security Deposit Total Initial Payment Number of Months in Lease Monthly Lease Payment Total Payments over Lease Term 5. Opportunity Cost of Initial Payment 6. Estimated End-of-Term Charges 7. Total Cost of Leasing PURCHASE Purchase Price 9. Down Payment Sales Tax on Purchase 11. Monthly Loan Payment 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 0.00 | Based on this analysis, Eli should: Use the lease to purchase the Fiesta, because its total cost is less than the total cost of a loan transaction Use the lease to purchase the Fiesta, because its total cost is greater than the total cost of a purchase transaction Use the loan to purchase the Fiesta, because its total cost is less than the total cost of a lease transaction Should Eli Lease or Purchase? Eli is considering the purchase of a Ford Fiesta and has negotiated a final price of $13,580. He's trying to decide whether to lease or purchase the vehicle. If he leases, he'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 $241 over the three-year term of the closed-end lease. The Fiesta will have a residual value of $5,432. On the other hand, if he buys the Fiesta, he'll have to make a 10% down payment, pay sales tax equal to 5% of the vehicle's price, and make monthly payments of $361 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 Eli 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 Eli. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) Amount AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS LEASE Item Description Initial Payment Capital Cost Reduction Security Deposit Total Initial Payment Number of Months in Lease Monthly Lease Payment Total Payments over Lease Term 5. Opportunity Cost of Initial Payment 6. Estimated End-of-Term Charges 7. Total Cost of Leasing PURCHASE Purchase Price 9. Down Payment Sales Tax on Purchase 11. Monthly Loan Payment 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 0.00 | Based on this analysis, Eli should: Use the lease to purchase the Fiesta, because its total cost is less than the total cost of a loan transaction Use the lease to purchase the Fiesta, because its total cost is greater than the total cost of a purchase transaction Use the loan to purchase the Fiesta, because its total cost is less than the total cost of a lease transaction
