Question

Damien Smart is trying to decide whether to lease or purchase a new car costing $18,000. If he leases, he’ll have to pay a $600 security deposit and monthly payments of $450 over 36 month term of the closed-end-lease. On the other hand, if he buys the car, then he’ll have to make a $2,400 down payment and will finance the balance with a 36 month loan requiring monthly payments of $515; he’ll also have to pay a 6% sales tax ($1,080) on the purchase price, and he expects the car to have a residual value of $6,500 at the end of three years. Use the automobiles lease versus purchase analysis for in worksheet 5.1 to find the total cost of both the lease and the purchase and then recommend the best strategy for Damien.

Answer 1

$the\ lease:\\\\ \ 450\cdot36(payments)- \ 600(security)=\ 16,200-\ 600=\ 15,600 \\\\ the\ purchase:\\\\down\ payments+payments+sales\ tax- residual\ value= \\\\=\ 2,400+\ 515\cdot36+\ 1,080-\ 6,500=\ 2.400+\ 18,540-\ 5420=\\\\=\ 15,520\\\\\ 15,520$

Answer 2

If he leases.
$600 (for security deposit) + (450 x 36) for closed end lease
$600 + $16,200
Lease cost = 16,800

If he buys.
$2,400 (for down payment) + (515 x 36) for closed end lease + 1,080 (for 6% tax)
$2,400 + $18,540 + $1,080 = $22,020
Purchase cost = $22,020
After selling at the residual value of $6,500
Purchase cost minus Residual value
$22,020 - $6,500
=$15,520

So, if he leases he will not be able to have the residual value and he'll be spending more than if he buys. he'll actually be making a loss of $1,280.

Final thought: HE SHOULD BUY!