Question

There is a choice to buy a car worth $28,000 with 100% financing at 4.99% APR for 60 month or lease at $450 per month. The car will need maintenance in the 3rd year worth $525 and $825 in the 4th year. The car will have 35% residual value in the 5th year. Sales tax on new car is 6% and required rate of return is 5%.

a) Calculate the Ownership Operating Advantage in year 5.
b) Calculate the Ownership Operating Advantage in year 4.
c) Which option is better?

Answer 1

To calculate the Ownership Operating Advantage, we compare the total cost of buying the car with financing versus leasing. The calculation includes the residual value, maintenance costs, and sales tax. The option with a higher Ownership Operating Advantage is better.

Step-by-step explanation:

To calculate the Ownership Operating Advantage, we need to compare the total cost of buying the car with financing versus leasing the car.

a) Ownership Operating Advantage in year 5:

To calculate the Ownership Operating Advantage in year 5, we need to calculate the cost of owning the car and compare it to the cost of leasing. The cost of owning the car in year 5 includes the residual value of the car, maintenance costs, and sales tax on the residual value. The leasing cost in year 5 is simply the monthly lease payment multiplied by 12 months. We can then subtract the leasing cost from the cost of owning to find the Ownership Operating Advantage.

b) Ownership Operating Advantage in year 4:

The process is the same as in year 5, but we also need to add the maintenance costs in year 4 to the cost of owning.

c) Which option is better:

The option that has a higher Ownership Operating Advantage is better. If the Ownership Operating Advantage is positive, buying the car is better. If it is negative, leasing the car is better.

Answer 2

The Ownership Operating Advantage is calculated by comparing the total cost of financing a car including maintenance minus the residual value with the total cost of leasing over the same period. For year 5, include 60 months of leasing versus financing plus maintenance, and for year 4, compare 48 months of leasing versus financing plus maintenance until that year.

Step-by-step explanation:

The student is analyzing the financial differences between buying and leasing a car. To calculate the Ownership Operating Advantage (OOA), we need to first find the cost of ownership and the cost of leasing over the same period, then compare these costs.

Year 5 OOA

• Financing cost: Calculate total amount paid for the car loan plus maintenance and subtract the car's residual value.
• Leasing cost: Multiply the monthly lease by 60 (5 years).
• OOA (Year 5) = Financing cost - Leasing cost.

Year 4 OOA

• Financing cost: Total paid for the car loan up to year 4 plus maintenance cost until year 4.
• Leasing cost: Monthly lease amount multiplied by 48 (4 years).
• OOA (Year 4) = Financing cost - Leasing cost.

To decide which option is better, the student would need to determine which scenario results in a lower cost over the term in question.