Question

You will need to to spreadsheets for the following situations-

1- Should you lease or should you buy a car comparison sheet? Use any auto makers promotions (for same vehicle) in regards to leasing, n, m, down payments, i, payments at signing, etc.,

2- Compare the cost of two 2018 vehicles (Honda Fit vs Toyota Prius). You can compare the different trims also. Use fuel efficiency standards from the automaker. Use $3.39 /gallon for fuel. Assume 12,000 miles per year driven, 4 oil changes per year (look at dealers websites for cost).. No salvage , no market value, 10 years analysis period. A tire change (all four) at year 8. Which car is the better deal using both NPW and EUAW analysis.

Answer 1

Part 1:

Lease option:

Annual lease payment	3500
Term of lease	10
Tax rate	30%
Required rate of return	10%
Annual lease payment	3500
Less: Tax shield (3500 x 30%)	1050
Net lease payment (3500 -1050)	2450

Lease option
Year	Cash outflow net of tax shield	PV factor @10%	Present value of cash outflow
1	2450	0.909091	2227.273
2	2450	0.826446	2024.793
3	2450	0.751315	1840.721
4	2450	0.683013	1673.383
5	2450	0.620921	1521.257
6	2450	0.564474	1382.961
7	2450	0.513158	1257.237
8	2450	0.466507	1142.943
9	2450	0.424098	1039.039
10	2450	0.385543	944.5811
Present value of total cash outflow			15054.19

Purchase option:

Purchase price	28000
Residual value after 10 years	3000
Depreciation method	SLM
Depreciation tax shield (3000 x 30%)	900

Purchase option
Year	Depreciation tax shield	PV factor @10%
1	900	0.909091	818.1818
2	900	0.826446	743.8017
3	900	0.751315	676.1833
4	900	0.683013	614.7121
5	900	0.620921	558.8292
6	900	0.564474	508.0265
7	900	0.513158	461.8423
8	900	0.466507	419.8566
9	900	0.424098	381.6879
10	900	0.385543	346.989
Present value of tax shiled			5530.11
Add: present value of residual value (3000 x 0.386)			1158
Present value total benefit			6688.11

Cash outflow at the year 0	28000
Less: Present value of total benefit	6688.11
Total cash outflow under purchase option	21311.89

As can be seen that the net cash outflow is less under lease option with $15,054.19 compare to present value of net cash outflow of $21,311.89 under purchase option it is clear that leasing option is financially beneficial to the organization.

Part 2:

	Honda Fit	Toyota Prius
Miles run each year	12000	12000
Fuel consumed in litre	2400	3000
Fuel cost (3.39 per gallon)
(2400 x 3.39/144)	56.5
(3000 x 3.39/144)		70.625
Oil changes cost (4 x 14)	56	56
Annual maintenance cost	112.5	126.625

The tire change cost has been assumed as following for:

Honda fir $50

And for Toyota Prius $40.

Honda Fit
Year	PV factor	Cash outlfow
1	0.909091	112.5	102.2727
2	0.826446	112.5	92.97521
3	0.751315	112.5	84.52292
4	0.683013	112.5	76.83901
5	0.620921	112.5	69.85365
6	0.564474	112.5	63.50332
7	0.513158	112.5	57.73029
8	0.466507	162.5	75.80745
9	0.424098	112.5	47.71098
10	0.385543	112.5	43.37362
Present value of total cash outflow			714.5892

Toyota Prius
Year	PV factor	Cash outflow
1	0.909091	126.625	115.1136
2	0.826446	126.625	104.6488
3	0.751315	126.625	95.13524
4	0.683013	126.625	86.48658
5	0.620921	126.625	78.62416
6	0.564474	126.625	71.47651
7	0.513158	166.625	85.50497
8	0.466507	126.625	59.0715
9	0.424098	126.625	53.70136
10	0.385543	126.625	48.81942
Present value of total cash outflow			798.5821

Thus, as can be seen that the present value of total cash outflow for Toyota Prius is higher thus, it seems that Honda Fit would be better choice to reduce the overall cost of maintenance.