Lease vs. Buy Analysis
Evaluate the financial implications of leasing versus buying assets.
User Prompt
Conduct a lease vs. buy analysis for acquiring for . Compare the total costs and benefits over the asset's useful life.
Sample AI Response
Conducting a lease vs. buy analysis for acquiring a company car for Nike involves evaluating the total costs and benefits associated with both options over the asset's useful life. Below is a structured approach to this analysis.
Assumptions
- Useful Life of the Car: 5 years
- Cost of the Car: $30,000
- Lease Terms:
- Monthly Lease Payment: $500
- Lease Duration: 5 years
- Mileage Limit: 15,000 miles/year
- Maintenance Costs:
- Lease: Included in the lease payment
- Buy: $1,000/year
- Depreciation:
- Estimated Depreciation Rate: 15% per year
- Financing Costs:
- Interest Rate for Buying: 5% per annum
- Tax Rate: 21%
- Residual Value: Estimated resale value after 5 years: $10,000
Total Costs Over 5 Years
1. Buying the Car
- Initial Cost: $30,000
- Depreciation:
- Year 1: $4,500 (15% of $30,000)
- Year 2: $3,825 (15% of $25,500)
- Year 3: $3,244 (15% of $21,675)
- Year 4: $2,762 (15% of $18,431)
- Year 5: $2,204 (15% of $15,669)
- Total Depreciation: $16,535
- Maintenance Costs: $1,000/year * 5 years = $5,000
- Financing Costs:
- Total Interest Paid over 5 years (using an amortization schedule) = approximately $3,500
- Total Cost of Ownership:
- Initial Cost + Maintenance + Financing - Residual Value
- Total Cost = $30,000 + $5,000 + $3,500 - $10,000 = $28,500
2. Leasing the Car
- Total Lease Payments: $500/month * 60 months = $30,000
- Maintenance Costs: Included in lease payments
- Total Cost of Leasing: $30,000
Summary of Costs
| Cost Component | Buying | Leasing |
|---|---|---|
| Initial Cost | $30,000 | $0 |
| Total Payments | $28,500 | $30,000 |
| Maintenance Costs | $5,000 | Included |
| Financing Costs | $3,500 | $0 |
| Residual Value | -$10,000 | $0 |
| Total Cost | $28,500 | $30,000 |
Benefits
- Ownership: Buying provides ownership of the asset, which can be beneficial for branding and asset management.
- Flexibility: Owning the car allows for unlimited mileage and customization.
- Tax Benefits: Depreciation can be deducted from taxable income when buying.
- Long-term Cost Efficiency: Buying may be more cost-effective in the long run if the car is kept beyond the useful life.
Conclusion
Based on the analysis, buying the car results in a total cost of $28,500, while leasing results in a total cost of $30,000 over the same period. Therefore, from a purely financial perspective, buying the car is the more cost-effective option for Nike over the asset's useful life.
However, Nike should also consider other factors such as cash flow, the need for flexibility, and the potential for changes in business needs when making the final decision.