PFIN 5th Edition by Randall Billingsley,Lawrence Gitman,Michael Joehnk

Exercise 4

Lease vs. purchase car decision. Use Worksheet 5.1. Fred Burk 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 the 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 percent 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 automobile lease versus purchase analysis form in Worksheet 5.1 to find the total cost of both the lease and the purchase, and then recommend the best strategy for Fred.