Cyberproblem

Should you Lease or Buy? —Smartmoney.com

This chapter has introduced leasing as a type of hybrid financing that companies may use to avoid heavy capital investment in property and equipment. While the next chapter examines the prospect of leasing from a corporate standpoint, it is important to realize that leasing can have a rather profound effect upon personal financial decisions.

Imagine that you have decided to get a new automobile. Even as recently as 20 or 30 years ago, your only option was to purchase the vehicle. However, in recent years, the practice of auto leasing has skyrocketed. The determination of a car lease can be very complicated and warrants serious consideration. Suppose you are considering leasing a car. The dealer has given you the following parameters for your lease:

 

Car price (capitalized cost)	$22,000
Value of trade-in (for your car)	$ 0
Down payment	$ 0
Length of the lease (months)	24
Residual value of car	$15,000
Sales-tax rate (%)	7
Interest rate (%)	8

Use SmartMoney.com's auto leasing information center to evaluate your position and answer the following questions. Go to http://www.smartmoney.com/autos/leasing/index.cfm?story=buylease. From this Web page, you are within a series of linked Web pages that deal with car leasing. You will be using all of these related pages.

1. According to SmartMoney.com, what are some of the advantages to leasing a car as opposed to buying the car?
   
   
2. What are some of the disadvantages to leasing?
   
   
3. According to SmartMoney.com, what is the most important thing to understand about leasing? Explain roughly how a lease works.
   
   
4. Inputting the dealer's numbers for the lease into the monthly payment calculator, what should your monthly payment be?
   
   
5. After reevaluating the dealer's numbers, you think there are some problem's with his/her data. You have consulted the Automotive Leasing Guide (ALG), and the ALG indicates that the leased car should have a residual value of $16,000 at the end of the lease. Furthermore, you feel that the interest rate for the lease should be 7 percent (not 8 percent). According to your numbers, what should your monthly payment be?
   
   
6. Assume that you can not get the dealer to stray from the terms he/she had previously set. Use the buy/lease calculator on the "To Buy or Lease?" page to make a decision, if you expect your portfolio of investments to earn an average return of 7 percent.