Question

Should jacy lease or purchase?

Should Jacy Lease or Purchase? Jacy is considering the purchase of a Toyota Prius and has negotiated a final price of $19,895. He's trying to decide whether to lease or purchase the vehicle. If he leases, he'l have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $270 over the four-year term of the closed-end lease. The Prius will have a residual value of $7,958. On the other hand, if he buys the Prius, hell have to make a 10% down payment, pay sales tax equal to 6% of the vehicle's price, and make monthly payments of $404 on a four-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 Jacy 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 and then recommend the best strategy for Jacy. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS LEASE Item Description Amount Initial Payment Capital Cost Reduction 1a. 1,990 1b. Security Deposit 500 2,490 Total Initial Payment 1c. Number of Months in Lease 2. 48 Monthly Lease Payment 3. 270 Total Payments over Lease Term 4. 48 Opportunity Cost of Initial Payment 5. Estimated End-of-Term Charges 6. 0.00 Total Cost of Leasing 7. PURCHASE Purchase Price 8. Down Payment 9. 10. Sales Tax on Purchase Monthly Loan Payment 11. Total Payments over Term of Loan 12. Opportunity Cost of Down Payment 13. Estimated Vehicle Value at End of Loan 14. Total Cost of Purchase 15.

Answer 1

	Lease		NOTES
1a	Capital Cost Reduction	1990
1b	Deposit	500
1c	Total Initial Payment	2490	t=0
2	# of months in lease	48
3	Monthly Lease Payment	270
4	PV of lease payments	11,724	PV(Rate, Nperiods,Payment)=PV(5%/12,48,270)
5	Opportunity Cost	5%
6	Estimated End of Term Charges	0
7	Total Cost of leasing	14,214	PV of leasing Cost=1c+4
	Purchase
8	Purchase Price	19895
9	Down payment	1990	10% Downpayment
10	Sales tax on Purchase	1194	6% of purchase Price
11	Monthly Loan Payment	404
12	Total Payment over loan period	17,893	PV(Rate, Nperiods,Payment)=PV(5%/12,48,440)
13	Opportunity Cost of Downpayment	5%
14	Estimated Vehicle value at end of Loan	7958
15	Total Cost of Purchase	14,529	=Down Payment+Sales Tax+PV of loan - PV of residual Value
16	Interest Rate on Loan	4%
17	Period of Loan (Months)	48
18	PV of residual Value	6547	=Residual Value/(1+Opportunity Cost)^Years = 7958/(1+5%)^4

Leasing is marginally better than Purchasing with the given inputs.