Chapter 17, Problem 17.6P

Lease-versus-purchase decision Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufacturer’s suggested retail price (MSRP) of $33,000. The dealership offers a 3-year lease that requires a capital payment of $3,300 ($3,000 down payment + $300 security deposit) and monthly payments of $494. Purchasing requires a $2,640 down payment, sales tax of 6.5% ($2,145), and 36 monthly payments of $784. Joanna estimates that the value of the car will be $17,000 at the end of 3 years. She can earn 5% annual interest on her savings and is subject to a 6.5% sales tax on purchases.

Make a reasonable recommendation to Joanna, using a lease-versus-purchase analysis that, for simplicity, ignores the time value of money.

1. a. Calculate the total cost of leasing.
2. b. Calculate the total cost of purchasing.
3. c. Which should Joanna do?