Car Lease vs.

Buy Example Step 1: Calc monthly pmt of buying

List Price Step 2: Calc PV of leasing
Acura TLX $ 4,000 a Step 3: Compare pmts
Step 4: Compare PV of leasing v buying
Option 1 Buy the car with a 36-month loan. Assume r = 5% Step 5: To compare time, assume sell car after 3 yrs.
# Months Loan 72 b Use blue book values, probabilities and take W.A.
R= 2.0% c Step 6: Determine PV of selling in 3 year
Down payment $ 3,000 d Step 7: Calculate loss of sale after 3 year
Principal $ 10,000 e Step 8: Compare net cost of buy/sell and lease
Monthly payment $ 148 f Step 9: Take into acct oppty cost of $10k if invested in mrkt
Step 10: Look at from dealer's perspective. How much made?
Option 2 36-month lease, no $ down
Monthly pmt $ 614 g
PV of lease payments $ 41,626 h

LESSOR
What is the car worth after 36 months?
Fair Condition Good Condition Excellent Condition
Blue book $ 22,592 $ 25,646 $ 25,925
Probabilities 16% 68% 16%

Weighted average price $ 25,202 i

(in three years)
What is the car worth today?
Inflation 5% j
NPV used $ 21,771 k

If you lease the car, how much does it cost in today's dollars?
NPV of all the lease payments $ 41,626

So how much more does it cost to lease vs. buy?

Additional cost of leasing $ (59,396)

Opportunity cost of 10k $ 3,310 <== Assume you could invest the downpayment money and earn 10% net IRR

Actual cost of leasing $ (56,086) <== This includes the opportunity cost of capital

Per month $ (1,557.96) monthly

Percent premium on price of car <== Your premium leasing the car
LESSOR
What does the leasing company make?

Total money made today leasing the car and selling it used in three years

NPV total m
Profit over just selling the car

How much equity did the dealership put into the car?
Equity in n
% Equity

How much cash does the dealership expect to extract in today's dollars?
PV equity out
Out/in ratio

Year 0 1 2 3
Cash
(n) (i)
What is the IRR of the dealers equity?
Annual IRR

Lease Rate Factor

Equipment cost × lease rate factor = periodic payment
Equipment cost = price of car a
Periodic payment g
LRF o
Lease two cars monthly payment =

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Down pmt 3000 Purchase Costs
Monthly loan pmt 350 25200 Down Payment 1500
loan term 72 Monthly loan paymen 450
lost interest 2% Loan term 48 months
salvage 4000 Salvage 4000
24560 24560 Opp cost 4%
purchase= down + (mo pmt * t) - end val + (down * opp cost * int rate) $19,340.00
24260
Lease costs 16860
lease = lease pmt + end of lease chg + security deposit * (int rate * time) security depo 500
lease pmts 450
Security deposit 300 lease term 3 yrs
mo lease pmt 300 /month 36
lease term 5 yrs EOL chg 600
60 months $ 2,480.00
opp cost 2%
end of lease charges 500
18530 18530

Purchase Price 120,000

Lease 500 per week
+ 1.2 per mile (avg 75miles/wk)
Maintenance 0.5 per mile
Insurance 5000 per year
Salvage (after 6 yrs) 20000
discount rate 10%
inflation rate 2.50%
7.500%

Purchase
Corporate Finance
Prof. Lisa Kaplowitz
Topic - Lease v Buy - Excel #1 - Slide 11

Car Lease vs. Buy Example Step 1: Calc monthly pmt of buying
List Price Step 2: Calc PV of leasing
Acura $ 34,500 a Step 3: Compare pmts
Step 4: Compare PV of leasing v buying
Option 1 Buy the car with a 36-month loan. Assume r = 5% Step 5: To compare time, assume sell car after 3 yrs.
# Months Loan 36 b Use blue book values, probabilities and take W.A.
R= 5.0% c Step 6: Determine PV of selling in 3 year
Down payment $ 10,000 d Step 7: Calculate loss of sale after 3 year
Principal $ 24,500 e = a-d Step 8: Compare net cost of buy/sell and lease
Monthly payment $ 734 f = - pmt(c/12,b,e) Step 9: Take into acct oppty cost of $10k if invested in mrkt
Step 10: Look at from dealer's perspective. How much made?
Option 2 36-month lease, no $ down
Monthly pmt $ 614 g
PV of lease payments $ 20,487 h=pv(c/12,b,-g) $ 20,486.54

LESSEE
What is the car worth after 36 months?
Fair Condition Good Condition Excellent Condition
Blue book $ 22,592 $ 25,646 $ 25,925 Assumption
Probabilities 16% 68% 16% Assumption
Weighted average price $ 25,202 i
(in three years)
What is the car worth today?
Inflation 5% j
NPV used $ 21,771 k=i/(1+j)^3

If you lease the car, how much does it cost in today's dollars?
NPV of all the lease payments $ 20,487 =h

So how much more does it cost to lease vs. buy?

Additional cost of leasing $ (7,757) =a-k-h

Opportunity cost of 10k $ 3,310 <== Assume you could invest the downpmt money and earn 10% net IRR
=10*(1.1^3)-10

Actual cost of leasing $ (4,447) <== This includes the opportunity cost of capital
-7757+3310

Per month $ (123.53) monthly

Percent premium on price of car -12.9% <== Your premium leasing the car
=4447/list price
LESSOR
What does the leasing company make?

Total money made today leasing the car and selling it used in three years

NPV total $ 42,257 m=h+k (PV lease pmts + Salv)

Profit over just selling the car $ 7,757 =m-a

How much equity did the dealership put into the car?
Equity in $ 14,013 n=a-h
% Equity 41% =n/a

How much cash does the dealership expect to extract in today's dollars?
PV equity out $ 21,771 =k
Out/in ratio 155% =k/n

Year 0 1 2 3
Cash $ (14,013) $ - $ - $ 25,202
(n) (i)
What is the IRR of the dealers equity?
Annual IRR 21.6%

Lease Rate Factor

Equipment cost × lease rate factor = periodic payment
Equipment cost = price of car $ 34,500 a
Periodic payment $ 614 g
LRF 0.0178 o=g/a
Lease two cars monthly payment = $ 1,228.00
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Corporate Finance
Prof. Lisa Kaplowitz
Topic - Lease v Buy - Excel #2 - Slide 16
Role: Matel CFO
Project: New machine for Mass Barbie production - Lease with Salvage

Assumptions: = I - ∑(PmtL(1-T) + T*Depreciation)/(1+Rd(1-T))t – A/T Salvage Value/(1+WACC)n

Purchase Price (I) $ 10,000,000 a
Incr Depr/yr $ 2,000,000 d Step 1: Calculate incremental benefit of leasing, exc. Salvage
Incr W/C $ - e
Repo/Salvage $ 6,000,000 f = I - ∑(PmtL(1-T) + T*Depreciation)/(1+Rd(1-T))t

T= 34% g Yr 1 2 3
WACC = 12% h Sales $ - $ - $ -
Rd = 8% i - CoGS + op ex 2,300,000 2,300,000 2,300,000
- Depreciation (2,000,000) (2,000,000) (2,000,000)
n (yrs) = 3j EBIT (300,000) (300,000) (300,000)
- Taxes (102,000) (102,000) (102,000)
Alt. Lease Pmt (PmtL) $ 2,300,000 k = NOPAT = EBIT*(1-T) (198,000) (198,000) (198,000) tax benefit bc negative
+ Depreciation (2,000,000) (2,000,000) (2,000,000)
- Capex - - -
- D Net W/C - - -
FCF = $ (2,198,000) $ (2,198,000) $ (2,198,000)
PV (YR 1-5) ($5,954,432)
NPV Lease only $ 4,045,568

Step 2: Calculate NPV of Salvage Value

=[Salvage value - T(Salvage Value - Book Value)]/(1+WACC)n
Note: Salvage value is > book value so NPV salvage value = NPV salvage + gain on sale of machine

$ 3,786,671

Step 3: NPV Project = NPV Lease - NPV Salvage

NPV Project $ 258,897

file:///conversion/tmp/scratch/401281110.xlsx/Ex #2 (In class) 11/07/2018 00:34:21

Corporate Finance
Topic - Lease v Buy - Excel #3 - Slide 18
Project: New machine for Mass Barbie production - Lease then Buy

I - ∑(PmtL(1-T)/(1+Rd(1-T))n - ∑T*Depreciation)/(1+Rd(1-T))K – Repurchase/(1+WACC)n + ∑T* Repurchase/(K-n)/(1+

Assumptions:
Purchase Price (I $ 10,000,000 a Step 1: Determine initial purchase price of equipment
Incr Depr/yr $ 2,000,000 d
Incr W/C $ - e $ 10,000,000
Repo/Salvage $ 6,000,000 f
Step 2&3: Calculate incremental benefit of leasing, exc. Salvage
T 34% g
WACC 12% h = - ∑(PmtL(1-T)/(1+Rd(1-T))n - ∑T*Depreciation/(1+Rd(1-T))K
Rd 8% i still 3 yr lease so lease pmt is for 3 years
nlease (yrs) 3j (difference is that lost tax benefit of depreciation now over 5 years, bc would use asset for 5 years if owned, 3 if leased
PmtL $ 2,300,000 k Yr 1 2 3 4
Kasset (yrs) = 5l Sales $ - $ - $ - $ -
- CoGS + op ex 2,300,000 2,300,000 2,300,000
- Depreciation (2,000,000) (2,000,000) (2,000,000) (2,000,000)
EBIT (300,000) (300,000) (300,000) 2,000,000
- Taxes (102,000) (102,000) (102,000) 680,000
= NOPAT = EBIT*(1-T) (198,000) (198,000) (198,000) 1,320,000
+ Depreciation (2,000,000) (2,000,000) (2,000,000) (2,000,000)
- Capex - - - -
- D Net W/C - - - -
FCF = $ (2,198,000) $ (2,198,000) $ (2,198,000) $ (680,000)

PV (YR 1-5) ($7,033,693)

Step 3: Calculate Repurchase price + tax benefit of depreciation a/f Repurchase

= – Repurchase/(1+WACC)n + ∑(T*Repurchase/(K-n)/(1+WACC)K-n

Yr 1 2 3 4
Sales $ - $ - $ - $ -
CoGS + op ex - - - -

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 Depreciation - - - 3,000,000
EBIT - - - (3,000,000)
Taxes - - - (1,020,000)
= NOPAT = EBIT*(1-T) - - - (1,980,000)
Depreciation - - - 3,000,000
Capex - - 6,000,000 -
D Net W/C - - - -
FCF = $ - $ - $ (6,000,000) $ 1,020,000

PV (YR 1-5) ($3,043,678)

Step 4: NPV Project

NPV Project $ (77,370)

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 BUY bc more expensive to repurchase as opposed to buying it outright

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hase/(K-n)/(1+WACC)K-n

ed, 3 if leased)
5
$ -

(2,000,000)
2,000,000
680,000
1,320,000
(2,000,000)
-
-
$ (680,000)

5
$ -
-

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 3,000,000 depr=6mrepo/2yrs remaining
(3,000,000)
(1,020,000)
(1,980,000)
3,000,000
-
-
$ 1,020,000

file:///conversion/tmp/scratch/401281110.xlsx/Ex #3 (In class) 11/07/2018 00:34:21