Math for Inquiring Minds: Example Course Activity

Leases and loans are two basic methods of financing an automobile. Each approach has its own benefits and drawbacks. We will focus on the underlying financial parameters to analyze the lease versus buy decision. However, there are also non-financial considerations that may affect your decision. For instance; how long do expect to keep the car? Is ownership more important that lower up-front costs? These and other non-financial considerations will affect your decision.

To reach a well-reasoned decision we will first analyze the cost of each option. Then, with a clear idea of the financial trade-offs in hand, you can look at the more subjective non-financial considerations.

Lease Versus Purchase Problem

Perhaps you've heard that leasing a new car may be cheaper that buying a car. After doing some research on the Internet you realize that the analysis is not so clear-cut. And that it would be best to do a lease versus purchase analysis before you go to to the car dealership to talk about the specifics.

Data obtained from the Web and assumptions:

• Cost of desired new car: $23,000
• You are prepared to make a $1000 down payment for either option (lease or loan)
• Interest rates: 6%
• Term (duration) of lease or loan: 36 months
• Monthly payment (includes interest rate: Lease - $388, Car Loan - $669
• The residual value of the leased car is $11,000. This is the value that you must pay if you decide to keep the car after the 36 month lease term - you know that will probably keep the car
• Lease mileage conditions: no incremental cost up to 12,000 miles per year, $0.25/mile above 12,000 miles. You expect to put 15,000 miles per year on the car.

Note: There are no additional leasing costs to consider for this problem

Organizing the Data

You sketched out the following table to organize your information.

The Assignment

Evaluate the total cost for both options (lease versus purchase) over the 36 month duration. Using the problem solving process and analytical tools you've learned about explain how you will reach a conclusion. Do your analysis work using a spreadsheet. After the analysis, if you decide to go with an option based on personal, non financial considerations, explain any negative financial impacts of your choice.

Summary of requirements:

• Your problem statement is clearly and concise
• You have identified all of your assumptions
• The analysis (spreadsheet) uses at least one table and one graph/chart
• The recommendation or decision is clearly stated

Remember, you are going to be discussing this topic with the car salesman, so you want to ensure that he/she understands the information you have gathered, the analysis that you did, and reasons for your thinking.

Source: LeaseGuide.com

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