Anna is considering the purchase of a Porsche Boxster and has negotiated a final

Question

Anna is considering the purchase of a Porsche Boxster and has negotiated a final price of $48,100. She's trying to decide whether to lease or purchase the vehicle. If she leases, she'll 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 $652 over the four-year term of the closed-end lease. The Porsche will have a residual value of $19,240. On the other hand, if she buys the Porsche, she'll have to make a 10% down payment, pay sales tax equal to 7% of the vehicle's price, and make monthly payments of $977 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 Anna 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 Anna. To complete the worksheet, enter the appropriate values in their corresponding blanks. Based on this analysis, Anna should: Use the lease to purchase the Porsche, because its total cost is greater than the total cost of a purchase transaction Use the lease to purchase the Porsche, because its total cost is less than the total cost of a loan transaction Use the loan to purchase the Porsche, because its total cost is less than the total cost of a lease transaction

Explanation / Answer

Use the loan to purchase the Porsche, because its total cost is less than the total cost of a lease transaction.

Automobile Leases Versus Purchase Analysis Lease Item Description Amount Initial payment 1a Capital Cost reduction 4,810 1b Security Deposit 500 1c Total initial payment 5,310 2 Number of Months in Lease 48 3 Monthly Lease Payment 652 4 Total Payment over Lease term 31,296 5 Opportunity cost of Initial Payments 25 6 Estimated End of term Charges 19,240 7 Total cost of leasing 55,871 Purchase Item Description Amount 8 Purchases Price 48,100 9 Down Payment 4,810 10 Sales tax on Purchase 3,367 11 Monthly Loan payment 977 12 Total Payment over terms of Loan 46,896 13 Opprtunity cost of Down Payment 241 14 Estimated Vehicle value at the end of Loan 0 15 Total Cost of Purchase 55,314

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