Purchase Costs Leasing Costs Down payment: $6,000 Security deposit: $2,000 Loan payment: $300 for 48 months Lease payment: $300 for 48 months Estimated value at end of loan: $5,500 End-of-lease charges: $825 Opportunity cost interest rate: 2 percent Calculate the costs of buying versus leasing a motor vehicle.

Please refer to Explanation

Explanation:

Hey there.

Question was a bit unclear so I attached a clearer version. Let's get to it then.

1. Cost of Buying.

Let's calculate the total loan payment to get it out of the way.

= 300 * 48 months

= $14,400

Now to calculate the cost of borrowing we will work it out as follows,

= Down Payment + Loan payment + ( opportunity cost of the down payment ) - Estimated value at the end of the loan.

= Down Payment + Loan payment + ( opportunity cost * down payment * years ) - Estimated value at the end of the loan.

= 6,000 + 14,400 + (6000 * 0. 02* 4 years ) - 5,500

= $15,380

$15,380 would be the total cost of buying the motor vehicle.

2. Leasing the motor Vehicle.

Looks like the lease payment is the same as the interest payment so we'll just skip calculating that part.

Using a similar formula we have,

= Total lease payment + End of lease charges + Opportunity cost of Security deposit

= Total lease payment + End of lease charges + ( security deposit * Opportunity cost * years)

= 14,400 + 825 + ( 2,000 * 0.02 * 4)

= $15,385

$15,385 is the total cost of leasing.

Comparing them,

$15,380 < $15,385 which shows that leasing would be more expensive than buying a motor vehicle.

disadvantages of leasing a vehicle: no vehicle equity and mileage limitations

disadvantages of purchasing a vehicle: large down payment and vehicle depreciation

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