In July 2004, the MSRP for a 2005 Dodge Grand Caravan SE Plus was $24,500. We will use this information to analyze the results of leasing versus buying the car. To ensure that we are making valid comparisons, we will assume:

There is no trade-in, the negotiated price is the MSRP, and a down payment of $2500 is made.
The license fee is 1.1% of the negotiated price.

If you purchase a car, then the state sales tax is 5.5% of the negotiated price. If you lease the car, then you make a state tax payment every month. The amount of each of the monthly state tax payments is equal to 5.5% of the monthly lease payment.

The annual interest rate for both a loan and a lease is 6% and the term of the loan or the lease is 60 months.

The residual value when leasing the car is 45% of the MSRP.

1. Determine the loan amount to purchase the car.

2. Determine the monthly car payment to purchase the car.

3. How much will you have paid for the car (excluding maintenance) over the five-year term of the loan?

4. At the end of 5 years, you sell the car for 45% of the original MSRP (the residual lease value). Your net car ownership cost is the amount you paid over the 5 years minus the amount you realized from selling the car. What is your net ownership cost?

5. Determine the net capitalized cost for the car.

6. Determine the lease payment. Remember to include the sales tax that must be paid each month.

7. How much will you have paid to lease the car for the five-year term? Because the car reverts to the dealer after 5 years, the net ownership cost is the total of all the lease payments for the 5 years.

8. Which option, buying or leasing,results in the smallest net ownership cost?

9. List some advantages and disadvantages of buying or leasing a car.