Most people lease for three years. When you purchase a car, you normally finance it with...

Most people lease for three years. When you purchase a car, you normally finance it with 60 month (5 year) loan. Compare two lease cycles to one purchase for the same car. Assume the second three-year lease costs are the same as the first lease. The car list cost is $27,450. The drive off fees associated with the lease are $1,250. Monthly lease payments are calculated on the three-year depreciation at 4.5% interest. Three-year depreciation is $12,692. The person buying the car is able to negotiate a $3,300 reduction in price and they put $2,400 down payment. The interest rate is 3.75%. The monthly payments are calculated on the net cost of the car. (Net cost = list cost-price reduction-down payment.) The sale value of the car at the end of six years is $9,787. What are the out of pocket costs for the lease compared to purchase? Both the lease and purchase must pay for routine maintenance and can be excluded from the analysis. The purchaser will have to spend $1,000 for a set of tires during the six years. The leaser does not have to pay for tires. At the end of a lease the leaser does not own a car, and must lease another car or purchase a car. Remember that the drive off fees are applicable to each lease. Compare the total out of pocket costs. Be sure to include the value of the 6-year-old car.

Please show show formulas in excel.

Expert Solution

Unable to attach excel. Please see below calculations. Feel free to ask in case any of the below is not understood well.

	Lease
Interest rate	4.50%
Tenor	3 years
Car list cost	27450
Drive off fees	1250
Lease payment - Year 1 (12692*4.5%)	571.14
Lease payment - Year 2 (12692*4.5%)	571.14
Lease payment - Year 3 (12692*4.5%)	571.14
Total cost of lease for 3 years	30413.42
Cost of lease for another 3 years	30413.42
Total Lease cost	60826.84

	Purchase
Interest rate	0.04
Tenor	5 years
EMI	4,851.38	PMT(3.75%,5,-21750)

Car list cost	21,750.00	27450-3300-2400
Interest cost	2,506.89
Tires	1,000.00
Less: Salvage	-9,787.00
Total cost of purchase	15,469.89
Note: Depreciation being non-cash expenditure is not considered

Repayment schedule	Opening o/s (i)	EMI (ii)	Interest (iii) [(i)*3.75%]	Principal (iv) [(ii)-(iii)]	O/s (v) [(i)-(iv)]
Loan - Year 1	21750.00	4851.38	815.63	4035.75	17714.25
Year 2	17714.25	4851.38	664.28	4187.09	13527.15
Year 3	13527.15	4851.38	507.27	4344.11	9183.04
Year 4	9183.04	4851.38	344.36	4507.01	4676.03
Year 5	4676.03	4851.38	175.35	4676.03	0.00
			2,506.89

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