buy the car for the assumed residual value, the justification for these fees disappears. In the
situation of (c) above, Ajay would probably choose to buy the car for its $18,350 residual
value (maybe to keep, maybe to sell himself) rather than pay this overage fee.The Lease versus Buy Decision
So, which is the better choice: leasing or buying?
Of course, there is no simple answer to that question. To some extent the answer depends
on individual circumstances and personal preferences. While the choice is seldom black
and white, there are certain things to consider in approaching that decision.
In Jessie’s case, the lease payment was quite a bit lower than what she would have had
to pay on her car loan. In Ajay’s case the difference was enormous. When this is happens,
and it very often does, the attraction of leasing is obvious.
However, the lower monthly payment can be deceptive. At the end of the lease’s term,
the car goes back to the leasing company. At the end of a car loan, you stop making pay-
ments but keep the car. Of course, at the end of the lease on one car you can always take out
a new lease on a new car, but as long as you keep leasing, you keep paying. Buying the car
may require a higher monthly payment, but those payments eventually end. The buyer has
the opportunity to eventually own the car “free and clear.” Of course, once the loan is paid
off, the car is no longer new, and so whether or not this is worthwhile depends on whether
it is more important to you to have a nearly new car or a paid-for car.
Leasing also comes with limitations, the most significant of which is mileage limits. If
the mileage limits allowed for a lease are below what you would normally expect to drive
in a year, the disadvantage of leasing should be apparent.
For businesses, the choice of leasing versus buying can take on some extra dimensions.
Leased property is treated differently on the business’s financial statements than owned
property, and there may be tax consequences as well. A business owner may need to take
advantage of the advice of an accountant to be able to sort out the pros and cons of leasing
as opposed to buying property the business needs.
In addition, leases are often offered under which the leasing company takes responsibil-
ity for the maintenance and repair of the equipment leased. This can be an attractive feature
for a business that does not want to have to train its employees to maintain and service
equipment or pay for a separate maintenance service contract.Leases for Other Types of Property
While we have used car leases as a familiar example of leasing, many other items are com-
monly leased as well. We will close this section with one such example.Example 10.4.5 Cotswold Real Estate needs new computers for its offi ces. The
computers would cost $10,543. The company is given the opportunity to lease the
computers for 3 years instead of buying them. If the leasing company assumes
a residual value of $845 and a 7.2% interest rate, what would the monthly lease
payment be?The calculation is handled here in the same way as we did for car leases. The loss in value
is $10,543 $845 $9,698.Payment on loss:PV PMT a _n (^) |i
$9,698 PMT a __ 36 | (^) .006
$9,698 PMT(32.29074882)
PMT $300.33
Interest on residual:
I PRT
I ($845)(0.072)(1/12)
I $5.07
462 Chapter 10 Consumer Mathematics