Briefly discuss the advantages and main reasons for leasing.

Consider the following data about a luxury automobile you wish to buy.

• Current purchase price of the car = $60000
• Discount rate on loan = 5.0%

Purchase option:

• Down payment = 20% of purchase price
• Expected resale value after 3 years = $40000
• Annual opportunity cost of funds = 8%

3. If the maturity of the loan is 3 years, what is the monthly payment?
5. What is the net cost of purchasing the vehicle?

Leasing Option:

The dealer is also offering a 3-year lease with monthly payment of $900, for no money down.
Explain the concept of equity insertion by the lessor?

6. What is the equity insertion?
8. What is the lease rate factor?
10. What is the cost of leasing?
12. What is the leasing company’s profit and return on the equity investment?
14. Which option – purchase versus leasing, is better from a strictly financial perspective? Are there any other considerations in the analyses?

Answer rating: 100% (QA)

Leasing offers several advantages over purchasing including Lower upfront costs With leasing the les... View the full answer