Lease v. Buy Comparison of Automobile Purchase Options Group 4 Jason Baughman Jared Shimizu Juan Sauceda Hung 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 F = Resell • Purchase n = 60 – Down Payment – Monthly Payment – Estimated Resell Value A = Monthly Payment P = Down Payment • Lease n = 60 – Down Payment – Monthly Payment – No Resell Value A = Monthly Payment P = Down Payment
Specific Cash Flows • Ford Focus – Down Payment • $4, 400 – Monthly Payment • Purchase - $252 • Lease – $205 – Resell Value • Purchase - $6, 000 • Lease - $0 • BMW 645 ci – Down Payment • $5, 000 – Monthly Payment • Purchase - $1234 • Lease – $1026 – Resell Value • Purchase - $22, 000 • Lease - $0
Present Worth of Cost • MARR – 15% – Assumes Other Financial Options Are Available – Should be set to expected ROR on other Ventures • Ford Focus Purchase $12, 181 – Lease $13, 032 • BMW 645 ci Purchase $46, 430 – Lease $48, 127
Equivalent Series • MARR – 15% – Same as in Present Worth • Ford Focus Purchase $290 – Lease $310 • BMW 645 ci 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 • 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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