Buy vs Lease

Case 12: Creating a Decision Support System Buy Versus Lease

A leading supplier of grapes to the wine-producing industry in California, On the Vine Grapes, wants to expand its delivery services and expand its reach to market by increasing its current fleet of delivery trucks. Some of the older vehicles were acquired through closed-end leases with required down payments, mileage restrictions, and hefty early termination penalties. Other vehicles were purchases using traditional purchase-to-own loans, which often resulted in high depreciation costs and large maintenance fees. All vehicles were acquired one at a time through local dealers.

On the Vine Grapes has asked you to assist in developing a lease/buy cost analysis worksheet in order to make the most cost-effective decision. Currently the director of operations, Bill Smith, has identified a 2005 Ford F-550 4×2 SD Super Cab, 161.8 in. WB DRW HD XLT as the truck of choice for the business. This vehicle has a retail price of $34,997.00 or a lease price of $600/month through Ford Motor Credit Company.

Here are some basic fees and costs that you need to factor in:

Lease Costs
Refundable security deposit $500
First month’s payment at inception $500
Other initial costs $125
Monthly lease payment for remaining term $600
Last month payment in advance No
Allowable annual mileage 15,000
Estimated annual miles to be driven 20,000
Per mile charge for excess miles

Purchase Costs
Retail price including sales taxes, title $34,997
Down payment $4,000
Loan interest rate 8.75%
Will interest be deductible business or home equity interest Yes
Is the gross loaded weight of the vehicle over 6,000 lbs
Yes

Common Costs and Assumptions
Total lease/loan term 36
Discount percent 8.75
Tax bracket-combined federal and state 33%
Business use percentage 100%
Some Particulars You Should Know

1. In the file BUYORLEASE.xls is a template you can use to enter the information.

2. Create a detailed sum

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