There it was on the cover of the August edition of Boy Racer Illustrated: the Englander Double Five HRM Special Edition Saloon. The stuff of dreams. For a mere $80,000 it could be his. Magazine in hand, Jonathan rushed down to the Englander dealer.

Jonathan knew he would buy the car. After all, who deserved it more than he? The only issue left was financing. Jonathan could pay cash or he could put $20,000 down and take a bank loan for the rest. What would my payment be with $20,000 down? he inquired. About $1,200 a month, replie3d the dealer.

That sounded like a lot. Before discouragement had time to set in, the dealer made his pitch: Have you considered the Englander Double Five Win Jubilee Lease? It would halve your down payment and take your monthly payments all the way down to $800. I know it sounds too good to be true. Its a rare special incentive promotion from Englander Finance. You pay only for the portion of the car that you use, so it comes out a lot cheaper than if you bought it outright. Its so cheap that its almost as good as paying cash for the whole thing.

Jonathans alternative were now clear. He could pay $20,000 down and borrow the rest from the bank at 10 percent per year, making payments for the next 66 months. Or he could go for the lease instead. The lease looked cheaper but it was harder to understand. It called for $10,000 down for something called capital cost reduction, and then he would pay only $800 for 36 months. The small print mentioned a residual of $60,000.He could, of course, simply return the car at the end of the lease and owe nothing. Maybe he would just save some money by paying the full $80,000 out of his personal savings, which he has invested at 10 percent per year.

1. Calculate Jonathans monthly payment if he took the bank loan. What would his total cash outlay be if he purchased the car in this manner? Does your answer demonstrate that Jonathan could save money by self-financing the purchase? Why or why not?
2. Compare the present value of leasing against that of buying. Which is the better choice? Suppose that Jonathan had good reason to expect that his Double Five would be worth at least $65,000 at the end of the three years. Would this fact change your analysis? What if the expected value would be $55,000? What does your analysis of these hypothetical situations tell you about the economic value of the Englander lease?