Lease v. Buy Comparison of Automobile Purchase Options Group 4 Jason BaughmanJuan Sauceda Jared ShimizuHung Ton

Purpose Determine the relative costs of Leasing and Buying vehicles Investigate whether Lease v. Buy decision is influenced by vehicle. Perform Sensitivity Analysis to Isolate the major decision dependencies.

Cash Flow Diagrams Purchase –Down Payment –Monthly Payment –Estimated Resell Value Lease –Down Payment –Monthly Payment –No Resell Value n = 60 A = Monthly Payment F = Resell P = Down Payment

Specific Cash Flows BMW 645ci –Down Payment $5,000 –Monthly Payment Purchase - $1234 Lease – $1026 –Resell Value Purchase - $22,000 Lease - $0 Ford Focus –Down Payment $4,400 –Monthly Payment Purchase - $252 Lease – $205 –Resell Value Purchase - $6,000 Lease - $0

Present Worth of Cost Ford Focus Purchase $12,181 –Lease $13,032 BMW 645ci Purchase $46,430 –Lease $48,127 MARR –15% –Assumes Other Financial Options Are Available –Should be set to expected ROR on other Ventures

Equivalent Series MARR –15% –Same as in Present Worth Ford Focus Purchase $290 –Lease $310 BMW 645ci Purchase $1,105 –Lease $1,145

Results Both Forms of Analysis Yield Same Result For Situation Considered –Purchase Favored –Similar Results For Both Vehicles

Sensitivity Analysis Needed to Gain Greater Understanding Investigate the Major Influences on Lease v. Buy Decision Factors to Consider –MARR –Length of Term –Amount of Down Payment

MARR Sensitivity At Low MARR –PWC For Lease > Buy –Buy Vehicle High MARR –PWC Buy > Lease –Lease is Appropriate At some value PWC Buy = lease –Must use another criteria to determine appropriate action.

Sensitivity Analysis Length of Loan or Lease –3 Scenarios (BMW only) 2 Years 3 Years 5 Years (Base Line)

Down Payment Sensitivity Line Slopes Dependant Interest Rate MARR > Interest Rate –Positive Slope MARR < Interest Rate –Negative Slope MARR = Interest Rate –Present Worth Independent of Down Payment

Annual Mileage Sensitivity PWC Less Sensitive to Mileage than Other Variables Within Allowable Range –No Change to Analytic Outcome

Conclusions MARR Plays a Major Role in Decision Process –If there exist alternative uses for capital use ROR for MARR –Greater MARR, More attractive Lease Becomes Desired Length of Ownership Important –Long Term Lease of Vehicle Undesirable –Short Term Lease Nearly Equivalent Present Worth –There Exists an optimum Lease Duration

Conclusions Cont. Down payment –Within Small Range, Little Effect on Present Worth –At large Values, Lease Becomes Preferred Option Annual Mileage –Little Effect on Present Worth –Analytic Outcome Unaffected

References Kelly Blue Book Onlinehttp:// NADA Official Used Car Pricing Guidehttp:// BWM USA, Inc. Online Financing Calculationhttp:// Tom Robinson Ford