Problem

Mr. Richard has a rich client that has come to him for advice, purchase or lease a new Porsche Carrarra? The care costs $108,000 and he would finance it for 84 months at 3.5% rate with 20% down plus 6% sales tax. The lease would be for 36 months, require $10,000 cash buy down and it would cost $1,393.08 including tax each month. The client will purchase this as a company vehicle. Leasing allows full deduction of the capital buy down and the lease payment and all other related expenses. The purchase is subject to MACSR depreciation limits and deduction of interest. More importantly, the clients company earns ROE of 10%. Should he lease or purchase? What is the real cost of the lease each month if the company tax rate is 35%?

Use the standard TVM setup to determine the montly payments for the purchasing of the vehicle give the information provided.

Calculate the total out of pocket expenses for both the purchase and the lease.

Calculate the opportunity cost (not keeping capital in the company earing 10%) of each transaction.

Calculate the cost of the lease after taxes.