When purchasing a new vehicle, many consumers are faced with many choices of fianceing, and part for the decision that needs to be addressed is buying or leasing. In this paper we will look at the differences between buying and leasing a new automobile.
In America, cars have become a way of life, and most people could not live without one. They have also become the second largest financial commitment that most people will make, outside of buying a house, and for some people, there car will cost more then their house (Bauldings, 2004).
Lease Versus Buying
Obviously in today's financial world there are numerous options to consider when making this financial decision. Essentially the decision you want to make is based on what is the best way to finance this purchase that meets your particular needs. It is also important to differentiate between acquiring business or personal assets (Bauldings, 2004).
In either case the fundamental issues are pay cash, finance at a bank or some other financial institution, and leasing. The lease versus purchase decision involves the application of capital budgeting methods (CLA, 2005). Now we need to determine the relevant cash flows and apply present value techniques. The four steps to do this include: after-tax cash outflows for each year under the lease alternative, after-tax cash outflows for each year under the purchase alternative, present value of cash outflows associated with the lease, and choose the alternative with the lowest present value of cash outflows from step three (Balance, 2005).
There are two basic kinds of leases; With a closed-end lease, at the end of the lease term you simply return the vehicle; you do not owe any additional money unless the car or truck shows more-than-normal wear and tear, has been damaged, or has...