Contact
an automobile dealership and find out the full out-of-pocket cost of purchasing
a specific model of car if you were to pay cash for it. Also find out the
details of the costs that are associated with leasing the same model car.
Answer the following questions.
(a)
What terms and conditions are associated with the lease? In other words,
specify the lease term, residual values and whether they are guaranteed by the
lessee or not, the lessor’s implicit interest rate, any purchase options, etc.
(b)
What cash flows are associated with the lease?
(c)
Which do you think is the better deal? Briefly explain.
(a)
The terms
and conditions associated with the lease of a vehicle include:
1. Lease costs which include
a) Leased vehicle price, which include price of
accessories, dealer installed options, freight and pre-delivery inspection, and
all applicable taxes such as federal air conditioning tax, provincial gas
consumption tax, tire tax, etc., but excludes GST and PST;
b) Optional extended warranty;
c) Optional life insurance;
d) Optional disability insurance;
e) Other (specify);
f) Less cash down payment;
g) Less trade-in allowance (net of amount owing on
trade-in); and
h) Less end value of vehicle, to arrive at the amount to
be amortized. (See item 8 below)
2. Total lease charges, representing interest, and
annual lease rate, stated as a percentage (the latter being provided in the
majority of cases).
3. The lease term, expressed in the number of months.
4. Amount of monthly payments (annuity due) including:
a) Number of monthly payments,
b) Base monthly payment (which is the amount to be
amortized [see item 1 h] above) plus total lease charges (interest) divided by
the number of monthly payments,
c) Plus GST,
d) Plus PST, to arrive at the total monthly payment.
5. Total of monthly payments arrived at by multiplying
the monthly payment by the number of monthly payments.
6. Summary of amounts due on delivery including:
a) Net cash down payment,
b) Net trade-in allowance,
c) GST, PST or HST
d) Vehicle licence fee,
e) Registration fee,
f) Other (specified),
g) First monthly payment, and
h) Refundable security deposit.
7. Specification concerning the kilometre charge for
kilometres driven beyond a set limit negotiated and specified in the lease to
fit the customer’s particular needs.
8. Lease end purchase based on the estimated fair market
value of the vehicle at the end of the term of the lease. This option price would have GST and PST
added as well as licence fee, registration fee, and charges related to
certification of the vehicle.
9. Other conditions of the lease include:
a) Insurance;
b) Maintenance repairs and operating expenses;
c) Taxes, registration and other charges;
d) Excess wear clauses;
e) Fines, liens and encumbrances;
f) Early termination clauses;
g) Defaults;
h) Warranties;
i) Guarantees; and
j) Clauses concerning modification or relocation of the
vehicle.
(b)
The cash
flows associated with the lease include the amounts specified under the amounts
due on delivery of the vehicle (item 6 of part (a) above); the monthly payments
under the lease, as calculated above; and “the lease end purchase” (described
in item 8 above), should the lessee choose the option price at the end of the
term of the lease, to purchase the vehicle.
(c)
The
purchase option is the better choice. In
the car lease, all of the risks associated with ownership are passed on to the
lessee. The amount provided as the
option price to purchase the vehicle at the end of the term of the lease is a
conservative amount arrived at by the lessor to reduce the risk to them from
the realization of the value of the vehicle through resale or through an
additional lease transaction, should the option to purchase not be exercised.
