Question

Use the following data: Down payment (to finance vehicle) $ 5,800 Down payment for lease $ 2,100 Monthly loan payment $ 810 Monthly lease payment $ 620 Length of loan 48 months Length of lease 48 months Value of vehicle at end of loan $ 10,800 End-of-lease charges $ 1,050 a. What is the total cash outflow for buying and for leasing a motor vehicle with a cash price of $34,000? b. Based on your answers in part a, would you recommend buying or leasing? Leasing Buying

Answer 1

Answer:

Lease option would cost  $32,910

Buy option  would cost $33,880  

The lease option would $970 less than the buy option($32,910-$33,880),hence lease option is preferable.

Explanation:

                                                                         Buy option      lease option

Down-payment                                                     $5,800            $2,100

Monthly payment($810*48)/($620*48)                $38,880          $29,760

Salvage value                                                       ($10,800)              -

End of lease charges                                                 -                   $1,050

Total cash outflows                                               $33,880            $32,910

From a cash flow point of view,the lease option would $970 less than the buy option($32,910-$33,880),hence lease option is preferable.

Note that the monthly payment lasts for 48 months in each of the two cases,hence the monthly payment was multiplied by 48 in order to arrive at total monthly repayments.

The value of the vehicle at end of loan repayment is an income ,hence it was deducted from the cost.

                                                     

Answer 2

Answer:

Ans. The total cash outflow for buying a -$34,000 vehicle is -$44,680, and for leasing the same vehicle is -$33,360

b) Based on the answers in part a), the best choice is leasing the vehicle.

Explanation:

Hi, well, we have 3 options here, 1) get a loan for a car, 2) lease that car, 3) lease and keep the car.

In order to find the cash outflow for each alternative, we have to add up all the negative cash flows, that is

Option 1 (loan)

$OutFlow=DownPayment+PMTs*Length=-5,800-38,880=-44,680$

Option 2 (just lease)

$OutFlow=DownPayment+PMTs*Length=-2,100-29,760=-31,860$

Option 3 (Lease Buying)

$OutFlow=DownPayment+PMTs*Length+FinalPMT=-2,100-29,760-1,500=-33,360$

As you can see, the lowest outflow of money is in the case you just lease the car.

The loan option is the worst one, since you pay for a $34,000 vehicle the amount of $44,680.

Best of luck.