Question

# ​Lease-versus-purchase decision Personal Finance Problem Joanna Browne is considering either leasing or purchasing a new Chrysler...

​Lease-versus-purchase decision Personal Finance Problem Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a​ manufacturer's suggested retail price​ (MSRP) of \$33,000. The dealership offers a 3​-year lease that requires a capital payment of \$3,500 ​(\$3,100 down payment​ + \$400 security​ deposit) and monthly payments of \$493. Purchasing requires a \$2,600 down​ payment, sales tax of 6.4% (\$2,112​), and 36 monthly payments of \$903. Joanna estimates the value of the car will be \$17,000 at the end of 3 years. She can earn 4.8% annual interest on her savings and is subject to a 6.4% sales tax on purchases. Make a reasonable recommendation to Joanna using a​ lease-versus-purchase analysis​ that, for​ simplicity, ignores the time value of money.

a.  Calculate the total cost of leasing.

b.  Calculate the total cost of purchasing.

c.  Which should Joanna​ do?

*Please show work if possible

Ans.

MSRP of the car = \$33,000

a) If Joanna plans to Lease

Down Payment = \$ 3,500

The Capital payment is = 493*12*3 = \$ 17,748

Opportunity Cost of Initial Investment = \$ 3,500 * 4.8% * 3 = \$ 504

The total cost of leasing involves = \$ 3,500 + \$ 17,748 + 504 = \$21,752

b) If Joanna plans to Purchase,

The cost of purchasing involves

Down Payment \$ 2,600

Sales Tax = \$ 2,112

Total Loan Payments = 36 * \$ 903 = \$ 32,508

Opportunity Cost of Initial Investment = \$ 2,600 * 4.8% * 3 = \$ 374.4

Therefore the cost of purchasing includes = \$ 2,600 + \$ 2,112 + \$ 32,508 + \$ 374.40 = \$ 37,594.40

Estimated trade-in value of car = \$ 17,000 ( given)

The cost of purchasing = \$ 37,594.40 - \$ 17,000 = \$ 20,594.40

c)

The total cost of purchasing is \$20,594.40 ( less) as compared to the cost of leasing i.e \$21,752, so Joanna should purchase the car instead of leasing.

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