Should Mai Lease or Purchase? Mai is considering the purchase of a Mini Cooper and has negotiated a final price of $23,450. She’s trying to decide whether to lease or purchase the vehicle.
A. If she leases, she’ll have to pay a $550 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle’s cost, and monthly payments of $415 over the three-year term of the closed-end lease. The Mini Cooper will have a residual value of $9,380.
B. On the other hand, if she buys the Mini Cooper, she’ll have to make a 10% down payment, pay sales tax equal to 5% of the vehicle’s price, and make monthly payments of $623 on a three-year loan that charges 4% interest.
C. Be aware that funds used as down payments and security deposits incur an opportunity cost of 3%, as they could have earned interest for Mai over the period of the lease or loan.
Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase and then recommend the best strategy for Mai. To complete the worksheet, enter the appropriate values in their corresponding blanks.
AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS
LEASE Item Description Amount ($)
Initial Payment
1a. Capital Cost Reduction
1b. Security Deposit
1c. Total Initial Payment
2. Number of Months in Lease
3. Monthly Lease Payment
4. Total Payments over Lease Term
5. Opportunity Cost of Initial Payment
6. Estimated End-of-Term Charges 0.00
7. Total Cost of Leasing
PURCHASE
8. Purchase Price
9. Down Payment
10. Sales Tax on Purchase
11. Monthly Loan Payment
12. Total Payments over Term of Loan
13. Opportunity Cost of Down Payment
14. Estimated Vehicle Value at End of Loan
15. Total Cost of Purchase
Based on this analysis, Mai should:.
A. Use the loan to purchase the Mini Cooper, because its total cost is less than the total cost of a lease transaction.
B. Use the lease to purchase the Mini Cooper, because its total cost is less than the total cost of a loan transaction.
C. Use the lease to purchase the Mini Cooper, because its total cost is greater than the total cost of a purchase transaction.