Finance Calculation: lease vs purchase?
Hi, I'm reading this finance book and as an exercise they have this question about purchasing vs leasing. Somehow I'm confused with the PV concept. Here's the question. You're considering buying an asset that has a three-year life and costs $15,000. As an alternative to buying the asset, you can lease it for $4,000/year (four annual payments, first due on the day you sign the lease). If you can borrow from your bank at 10%, should you buy or lease? The answer is LEASE. The PV of the lease option is $13,947.41 (4000+PV(10%,{4000,4000,4000}) for excel readers). But what I don't understand is the concept behind the PV in this case. The purchase will cost you $15,000, while the lease will cost you at least $16,000 (4*$4,000). How come the answer is LEASE?
Public Comments
- You must compare the present value of the money.. If you do not know how, then learn the concept of "interests" first.
- If you have to borrow the $15,000 at 10%, then the "buying" will cost you more. This is kind of a ridiculous scenario- what has a three-year life that would be that expensive? Let's look at a real life scenario where you buy a car at $15,000 versus leasing something at $4,000 a year. Even if you pay more during the lease time, the lessor is left with nothing at the end of the lease while the buyer actually has a car that's worth probably around $10,000. My advice- if you're in the market for something that costs $15,000 and is not going to be worth anything in 3 years- I have some nice swamp land in Florida that you should have a look at. Cheers
