Question

Imagine that you have decided to acquire your dream car.  You now have to decide whether to buy or lease that car. Write a report specifying the differences between leasing and buying your dream car and make a decision on whether to buy or lease.

In writing your report you must do the following:

Gather the terms under which you would lease the car, such as the necessary down payment amount and monthly payment amount.

Calculate the total costs when leasing the car.

Gather the terms under which you would buy the car, such as the necessary down payment amount and monthly payment amount.

Calculate the total costs when buying the car.

Include the benefits, drawbacks, and costs involved with each of the two financial options.

Consider what measures you could use to make a decision.

Decide on a specific measure to use as the basis of your decision and explain why you chose that measure.

State your decision.

Answer 1

I have decided to acquire my dream car however it does not have funds for the same.

There are 2 funding alternatives:-

1. Take the machine on lease

2. Borrow funds and buy the Car.

We will compute the cost of each alternative and decide accordingly.

COST OF LEASING (COL)

When rents are payable at the end of each year.

COL= Present value of post tax lease rental

When rents are payable at the beginning of each year.

COL= Present value of lease rental-Present value of Tax shield on Lease rental.

Cost of Borrow funds and buy the Car.(COB)

COB=

Present value of Interest and Principal repayment-

-

Present value of Depreciation tax shield

-

Present value of Interest tax shield

-

Present value of Salvage value.

Breakeven rental from lease point of view

Maximum rental that "lease" is ready to pay. It is given by-

COL(P.V OF POST TAX LEASE RENTAL)=COB

Net advantage of lease

NAL=COB-COL

Decision criteria-

We should select that alternative having less cost (COB,COL).

if the cost of leasing is more try to negatiate with the lessor based the maximum lease rental computed as per the above calculation method.