Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufacturer's suggested retail price (MSRP) of $33,000. The dealership offers a 3-year lease that requires a capital payment of $3,300 ($3,000 down payment + $300 security deposit) and monthly payments of $494. Purchasing requires a $2,640 down payment, sales tax of 6.5% ($2,145), and 36 monthly payments of $784. Joanna estimates the value of the car will be $17,000 at the end of 3 years. She can earn 5% annual interest on her savings and is subject to a 6.5% sales tax on purchases.
Make a reasonable recommendation to Joanna using a lease-versus-purchase analysis that, for simplicity, ignores the time value of money.
a. Calculate the total cost of leasing.
b. Calculate the total cost of purchasing.
c. Which should Joanna do?