The Reeds are considering the purchase or lease of a $20,000 car. They have used the worksheet shown in Figure 7.4 to evaluate the relevant costs. They estimate that the initial expenses for leasing are $1,000 and the initial expenses for purchasing are $5,000. They could lease the car for 48 months for a total monthly expense of $200. If they purchase, they could obtain a 48-month loan at an 8 percent APR with monthly loan payments of $366.19. The final expense on the lease side of the ledger is zero. The returned security fee just offsets the disposition fee. If they sell the car, the net residual value after selling costs is $13,000. Over the next few years they expect to earn a 5 percent after-tax return on their investments.
1. Before considering the time value of money, is it better to lease or buy?
2. After considering the time value of money, is it better to lease or buy?