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Lease v. Buy Comparison of Automobile Purchase Options

Lease v. Buy Comparison of Automobile Purchase Options. Group 4 Jason Baughman Juan Sauceda Jared Shimizu Hung Ton. Purpose. Determine the relative costs of Leasing and Buying vehicles Investigate whether Lease v. Buy decision is influenced by vehicle.

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Lease v. Buy Comparison of Automobile Purchase Options

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  1. Lease v. BuyComparison of Automobile Purchase Options Group 4 Jason Baughman Juan Sauceda Jared Shimizu Hung Ton

  2. 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.

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

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

  5. 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

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

  7. Results • Both Forms of Analysis Yield Same Result • For Situation Considered • Purchase Favored • Similar Results For Both Vehicles

  8. 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

  9. 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.

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

  11. 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

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

  13. 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

  14. 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

  15. References • http://www.kbb.com/ Kelly Blue Book Online • http://www.nada.com NADA Official Used Car Pricing Guide • http://www.bmwusa.com/ BWM USA, Inc. Online Financing Calculation • Tom Robinson Ford

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