Question

13. You're considering leasing or purchasing a car. The details of each method of financing are given below. The lease is for 24 months. What should you do? 2 MSRP 3 Capitalized cost 4 Destination charge 5 Acquisition fee 6 Security deposit AUTO LEASE VERSUS PURCHASE 50,000.00 <- Manufacturer's suggested retail price 45,000.00 <-- Negotiated price 415.00 <-- Paid both by the lessee and the buyer 450.00 <-- Paid only by the lessee 450.00 <-- refunded at end of lease 7 1,315.00 600.00 <-- Dealer's lease offer 8 Payment due at signing 9 Monthly payment 10 11 Residual value after 2 years as % of MSRP 12 Lease residual value after 3 years 13 Your estimated residual value 14 15 Bank loan cost (annual) 60% 30,000.00 <-- =B11*B2 35,000.00 <-- Your guess 7.00%

Answer 1

Cash Flows	0	1	2	Total NPV of cash flows
Purchase Price	(45,000.00)
Acquisition Fee	(450.00)
Destination Fee	(415.00)
Residual Value			35,000.00
	(45,865.00)	-	35,000.00
Discount Factor @ 7%	1.00	0.93	0.87
	(45,865.00)	-	30,570.36	(15,294.64)
Cash Flows	0	1	2	Total NPV of cash flows
Security Deposit	(450.00)
Acquisition Fee	(450.00)
Destination Fee	(415.00)
Payment due at signing	(1,315.00)
Lease Payments	(7,200.00)	(7,200.00)
	(9,830.00)	(7,200.00)	-
Discount Factor @ 7%	1.00	0.93	0.87
	(9,830.00)	(6,728.97)	-	(16,558.97)
Since NPV of cash outflows is lower in purchase option, hence purchase option is better
Please note following:
Residual value is taken as 35,000. If residual value remains at $30,0000, then lease model will be beneficial.
For ease cash flows are assumed to be taking place at the beginning of period. The result may be different, if monthly cash flows are considered in place of annual cash flows.
However, this would complicate the calculations