Use Worksheet 5.1. Art Winkler is trying to decide whether to lease or purchase a new car costing $18,000. If he leases, he’ll have to pay a $600 security deposit and monthly payments of $425 over the 36-month term of the closed-end lease. On the other hand, if he buys the car then he’ll have to make a $2,400 down payment and will finance the balance with a 36-month loan requiring monthly payments of $515; he’ll also have to pay a 6% sales tax ($1,080) on the purchase price, and he expects the car to have a residual value of $6,500 at the end of 3 years. Art can earn 4% interest on his savings. Use the automobile lease versus purchase analysis form in Worksheet 5.1 to find the total cost of both the lease and the purchase and then recommend the best strategy for Art.

Worksheet 5.1

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AUTOMOBILE LEASE VERSUS PURCHASE ANALYSIS* Name Elaine Hodges Item Description LEASE Date April 2011 Amount 1 Initial payment: a. Down payment (capital cost reduction): b. Security deposit: 2 Term of lease and loan (years)* 3 Term of lease and loan (months) (Item 2 12) 4 Monthly lease payment 5 2,200.00 Total payments over term of lease (Item 3 x Item 4) 6 Interest rate earned on savings (in decimal form) 500.00 $ 2,700.00 7 Opportunity cost of initial payment (Item 1 x Item 2 x Item 6) 8 Payment/refund for market value adjustment at end of lease ($0 for closed-end leases) and/or estimated end-of-term charges 9 Total cost of leasing (Item 1a + Item 5 + Item 7 + Item 8) PURCHASE 10 Purchase price 11 Down payment 12 Sales tax rate (in decimal form) 48 $50.00 $ 16,800.00 0.040 432.00 0.00 39482.00 $22,000.00 $3,500.00 $ 0.05 $1,100.00 14 Monthly loan payment (Terms: 18,500.00, 48 months, 15 Total payments over term of loan (Item 3 x Item 14) %) 443.01 13 Sales tax (Item 10 x Item 12) 16 Opportunity cost of down payment (Item 2 x Item 6 x Item 11) 17 Estimated value of car at end of loan 18 Total cost of purchasing (Item 11+ Item 13+ Item 15 + Item 16 Item 17) DECISION $21,26427 + 560.00 12.100.00 $1452427 If the value of Item 9 is less than the value of Item 18, leasing is preferred; otherwise the purchase alternative is preferred.