5. The lease versus purchase analysis - Part 2

Which is better: to lease or to buy?

A car buyer has two financing alternatives: to lease or to purchase. It is important to evaluate all the options and analyze the consequences of lease versus purchase decision. The understanding of a comparative worksheet that analyzes the automobile lease versus purchase decision will help in making an informed choice.

How should a lease-versus-purchase analysis be conducted? How can this worksheet be applied to help you or someone else make their financing decision? Consider the following scenario:

Should Susan lease or purchase?

Susan is considering the purchase of a Volvo C70 and has negotiated a final price of $39,950. Shes trying to decide whether to lease or purchase the vehicle.

	If she leases, shell have to pay a $600 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicles cost, and monthly payments of $708 over the three-year term of the closed-end lease. The Volvo will have a residual value of $15,980.
	On the other hand, if she buys the Volvo, shell have to make a 10% down payment, pay sales tax equal to 6% of the vehicles price, and make monthly payments of $1,062 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 5%, as they could have earned interest for Susan 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 strategy for Susan. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dor.) Based on this analysis, Susan should: Use the lease to purchase the Volvo, because its total cost is less than the total cost of a loan transaction. Use the loan to purchase the Volvo, because its total cost is less than the total cost of a lease transaction. Use the lease to purchase the Volvo, because its total cost is greater than the total cost of a purchase transaction. Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase strategy for Susan. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dor.) Based on this analysis, Susan should: Use the lease to purchase the Volvo, because its total cost is less than the total cost of a loan transaction. Use the loan to purchase the Volvo, because its total cost is less than the total cost of a lease transaction. Use the lease to purchase the Volvo, because its total cost is greater than the total cost of a purchase transaction