Project 3 Buy or Lease a Car? Scenario A good friend, Maria, has just asked your advice now that you are taking business math. She has never owned a car before and doesn’t know if she should lease or buy one. She doesn’t really understand the financial or other advantages and disadvantages of owning versus leasing. She has visited a dealership and gotten some basic information on the car of her choice. Maria summarized the information from the dealer into a table and outlined some of her questions. She would like your help analyzing the information and deciding what to do. 1. Put a heading at the top of worksheet with your name and the project title. 2. Complete the remaining entries under Solution Plan in the worksheet. Be sure to use complete sentences in items 1 through 5. 3. Scroll back up the worksheet and look at the questions under What we are looking for and include your answers under each question. Be sure to write in complete sentences. 4. Now it’s your turn. Pick a car that you like and that you may be able to afford. Complete the following. Use full sentences in all responses. 1. Call or visit a dealership and find out how much it would cost to lease and to purchase the car of your choice. Don’t forget to record the name of the person you speak to, their title, the date, and the dealership name. Be sure to specify what optional equipment you want. Be specific. Tell me the exact model you want. 2. Visit the two websites http://www.kbb.com/ and http://www.edmunds.com/ and get the car sticker price, dealer costs, and the average purchase price for the car you selected. How does the dealer cost compare to the sticker price? Be sure you include all the options you specified when you priced the car with the dealer. How does this information help you when negotiating with the dealer? 3. New cars depreciate, that is lose value, as soon as you drive them out of the showroom. Some cars hold their value better than others. Search on the web and find out about depreciation rates on new cars. See if you can find the rate for the car you are interested in. Use the websites listed above and look up the resale value of a three-year-old model of the car you are interested in. Compare it to some other cars. What does that tell you about the rate of depreciation on the car you are interested in? 4. After reviewing your answers to question 6 on the worksheet what would you do – buy or lease? Why? 5. Include a Reference List giving all sources you consulted for this project. If you are not sure how to properly cite your references ask reference librarian: Use APA.) Worksheet: Should Maria Buy or Lease a Car? What we know: Maria has $5,900 in savings. The dealer has qualified her to either purchase or lease the car and she feels she can comfortably afford either payment. To purchase the car: The purchase price of the car is $. A % minimum down payment is required. The sales tax rate is 7%. The APR for buying the car is %. With a minimum down payment of %, the monthly payment is $ License taxes and fees total around $ With normal driving, the car will be worth $ after 4 years. Due at Signing: Down payment, first monthly payment, and license taxes and fees To lease the car: The purchase price is $. A 5% Capital Cost Reduction Payment is required at the beginning of the lease. The sales tax rate is 7% sales tax on the monthly payment amount only. The APR for leasing the car is %. The monthly lease payment, including sales tax, is $. The residual value at the end of the lease term is $. License taxes and fees total around $. With normal driving, the car will be worth $ after 4 years. Due at Signing: Capital reduction fee, first monthly payment including sales tax, and license taxes and fees What Maria wants to know: 1. What is the total cost of buying a car over 48 months? 2. What is the total cost of leasing a car over 48 months? 3. What are the tradeoffs when considering leasing or buying? 4. Should Maria purchase or lease the car? Solution Plan: Buy vs. Lease comparison table. Fill in the missing numbers: To Purchase To Lease Actual Purchase Price = MSRP less any discounts.* $ Capitalized Cost: (cost of the car) $ Down Payment 5% $ Cap Reduction 5% (similar to down payment) $ Sales Tax Rate Sales tax paid only on lease payments Amount Financed = Purchase Price + Sales Tax – Down Payment Amount Leased = Purchase Price – Cap Reduction – Residual Value (dealer determined) Loan Term (months) ? Lease Term (months) ? APR % Interest Rate % Monthly Loan Payment $ Monthly Lease Payment including 7% tax and cost of money factor** $ Total of all monthly payments + down payment $ Total of all monthly payments + cap reduction payment $ Residual Value / Equity Value at conclusion of loan Residual Value at conclusion of lease $ Total monthly payments + down payment – residual value $ Total payments plus cap reduction payment minus equity $ Taxes and License Fees $ Taxes and License Fees $ * MSRP: Manufacturer’s Suggested Retail Price ** Cost of Money Factor: Over the period of the lease, the dealer charges for the unpaid portion of the car value. The factor varies as government rates vary, but is locked in at the time of signing. 1. At the time of signing, roughly how much will Maria have to pay if she wants to purchase the car with the minimum required down payment? How much will she have to pay if she wants to lease the car? Can she afford the down payment for either option? a) She will pay $ once she purchases the car. b) She will pay $ if she wants to lease the car. c) She can afford both option with her budget? 2. The salesman gave Maria a number of options regarding the size of her down payment and the resulting monthly payment numbers. Why does the monthly payment number go down when the down payment rises? The monthly payment number goes down because we are paying the amount financed in a short time. People choose to pay more down payment because they will pay less interest and save their money. 3. Which plan will require the least out-of-pocket cash after making 48 monthly payments: purchase or lease? How much less cash? Lease is the cheapest way to have a car because you don’t have to pay total amount of the car and people can afford lease payment monthly. If we lease a car, the amount will be saved $ . 4. Compare the total costs for buying and leasing the car factoring in equity. Which is the better deal? Why? If only concern is making the most sensible financial decision for acquiring the car, purchase a one, pay it off and keep it for a few years but purchasing cars aren’t for everyone. If I want the latest technology or like having a new car every three years, leasing are the routes to take. If a low monthly payment is your primary goal, leasing might be the best approach. Leasing protects you against unexpected depreciation. If the market value of the car unexpectedly drops because of a shift in the market, brought about by such things as rising gas prices, you aren’t hurt. Lease the car is always good option for low-income people because they can afford the monthly payment and change the car when they do not like the model anymore. 5. If you plan to keep the car longer than 48 months, why would purchasing the car be a better financial decision than leasing the car? If I plan to keep the car longer than 48 months, I would purchase the car is a better option because you pay the total amount in 4 years and your payment is done. But if I would lease a car, I need to keep paying more than 48 payments. 6. When considering whether to lease or buy, ask these questions: Question Yes No Is driving a new vehicle every 2–3 years important to you? Do you want to drive a car that is relatively expensive considering your income? Do you keep your car neat, clean, and well-maintained? Do you drive less then 12,000 miles per year? Can you afford the monthly payment required to purchase, rather than lease, the vehicle that you want? Do you plan to keep this vehicle longer than 3–4 years? Do you want to make modifications to the vehicle (paint, engine modifications, exhaust system, etc.)? If you answered “yes” to the first four items on the table, a lease may be your best option. If you answered “yes” to the last three items, a purchase may be best. 7. Once you buy or lease a car, consider your ongoing operating costs. Estimate what these will be in our local area: Insurance $ State and local taxes $0 Vehicle Inspection fees $0 Fuel $ Maintenance $ Repairs $ As a final step, I picked a car of your choice. Call dealership of your choice and where is located. After that, I talked with sales person over the phone, give date of call. If I want to lease the car, I will pay $ and 0.00% APR in 60 months. If I decided to buy the car, I will pay $ as total amount. When I visit http://www.kbb.com/ , get the purchase price is $ for the car. After getting the price of the car, I negotiate with dealership cause the website offer cheaper price than dealership. So, dealership offered $ for the car you picked. Total depreciation will be $ for car. Total depreciation percentage is % If the mileage less than other cars, resale value will be on average. For example, let suppose the car has 7000 mileage, resale $22,714.
