Answer Happy

Should Eric lease or purchase? Eric is considering the purchase of a Porsche Boxster and has negotiated a final price of $48,100. He's trying decide whether to lease or purchase the vehicle. 1a. 1b. Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase strategy for Eric. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) 1c. 2. 3. 4. 5. 6. 7. • If he leases, he'll have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $652 over the four-year term of the closed-end lease. The Porsche will have a residual value of $19,240. LEASE Item Description Initial Payment Capital Cost Reduction Security Deposit i • On the other hand, if he buys the Porsche, he'll have to make a 10% down payment, pay sales tax equal to 8% of the vehicle's price, and make monthly payments of $977 on a four-year loan that charges 4% interest. • Be aware that funds used as down payments and security deposits incur an opportunity cost of 4%, as they could have earned interest for Eric over the period of the lease or loan. Total Initial Payment Number of Months in Lease Monthly Lease Payment Total Payments over Lease Term Opportunity Cost of Initial Payment Estimated End-of-Term Charges Total Cost of Leasing $ $ Amount ($) 0.00

PURCHASE 8. 9. 10. 11. 12. 13. 14. 15. Item Description Purchase Price Down Payment Sales Tax on Purchase Monthly Loan Payment Total Payments over Term of Loan Opportunity Cost of Down Payment Estimated Vehicle Value at End of Loan Total Cost of Purchase Based on this analysis, Eric should: Amount ($) Use the lease to purchase the Porsche, because its total cost is less than the total cost of a loan transaction. Use the lease to purchase the Porsche, because its total cost is greater than the total cost of a purchase transaction. Use the loan to purchase the Porsche, because its total cost is less than the total cost of a lease transaction.