17.6 Lese versus purchase Joanna Browne is considering either leasing or purchas

Question

17.6 Lese versus purchase Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufactures suggested retail price (MSRP) of $33,000. The dealership offers a 3 year lease that requires a capital payment of $3,300 ($3,000 down payment+$300 security deposit) and monthly payments of $495. Purchasing requires a $2,640 down payment, ($2,145), and 36 monthly payments of $784. Joanna estimates that the value of the car will be $17,000 at the end of 3 years. She can earn 5% annual interest on her savings and is subject to a 6.5% sales tax on purchases. Make a reasonable recommendation to Joanna using a lease verses purchase analysis that, for simplicity, ignores the time value of money.

a) Calculate the total cost of leasing

b) Calculate the total cost of purchasing

c) Which should Joanna do?

Explanation / Answer

MSRP of the car = $33000
If Joahna plans to Lease -
a) The Capital payment is 495*12*3

The total cost of leasing involves 495*12*3 + 3300 = $21120

b) If she plans to Purchase,
The cost of purchasing involves 2640+ 36*784 = $30864

Sales tax of 6.5% is levied that comes out to be $ 2006.16 for $30864

Therefore the cost of purchasing includes the sales tax as well. =30864+2006.16 = 32870.16

c) Value of car after 3 years is $17000. Purchasing the car seems to be a better option than leasing as Joanah loses around ($30864- $17000) $13864 after 3 years. This can be considered as the depreciation value. The interest on savings if Joanah leases the car is meagre amount of around $450 per annum. Therefore purchasing the car is a better option.

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