Analyze the situation and explain how you would make a decision.You want a new car but plan to use it for only 2 years. The cost of leasing is $2,000 down and $300 per month. The cost of buying is $20,000, and you can expect to sell it in two years for approximately $12,000. Which is the better option?

Question

What will be an ideal response?

Answer 1

Answers may vary. One possibility: If you lease the car for two years, it will cost $9200  If you buy it, it will cost $8000  . At first glance, it appears that buying is a better option. However, you need to consider other factors before you make your decision. How do you know that you will be able to sell the used car for $12,000 in two years? If your estimate is off by only 10% ($1200), then leasing will already be as cost-effective. In addition, you need to consider how the time value of money makes buying a less attractive option. The higher the interest rate, the more it will implicitly cost to buy the car (whether you borrow and pay interest expense or pay cash and forego interest income). Moreover, you should read all the fine print of the lease agreement. Are you locked into the lease for two years? Can you keep it longer if you wish? Are there any additional costs due when you return the car?