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I just leased a Saab, so I happened to have recently thought about the lease-buy comparison. Hopely it helps someone.
The flawed calculations that I've seen basically compare nominal dollars, which fails to take account of the fact that a dollar paid on a lease 3 years from now can be worth much less than a dollar paid today. In principle, all lease payments including the lease-end residual should be discounted to calculate the "present value" (multiply by e to -rT, quite easy to do on spreadsheets). Such calculations are by their nature, what-if scenarios. I'd determine the break-even r for the lease payments to equal the cash buy price (incorporating any differences in incentives). Then ask yourself whether you think the cash, which could be used to buy the car, would likely earn more or less than the break-even r (its "opportunity cost"). If your best guess is that it would earn more, the lease is a better deal. If you think the contracted residual will be lowered at lease-end (likely since Saab residuals are optimistic and/or subsidized), then the present value of the lease is even lower. For a purchase, whether to pay cash or finance simply depends on whether you think the cash would earn more or less than the financing rate.
Down payments should be avoided on leases. Paraphrasing Car_Man on Edmunds leasing forum, if the car is totaled the day after the lease begins, the entire down payment is lost, and down payments have no effect on the residual. To determine whether to roll taxes and fees into the lease, do the present value calculation. Also, the money factor or lease interest rate cannot be easily compared to a normal interest rate since it is applied to the capitalized cost and residual, not depreciation as some comments suggest.
John
posted by 128.175.21...
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