Buy or lease: the eternal question.An auto leasing toolbox See toolkit and toolbar. . It's it's 1. Contraction of it is. 2. Contraction of it has. See Usage Note at its. it's it is or it has it's be ~have easy to understand the allure of auto leasing: Consumers make lower monthly payments; dealers gain volume, move expensive inventory--and keep customers. So it's not surprising to find that one of every three new cars on the road today is leased. Although lease contracts have become more flexible and can be tailored to meet individual needs, many consumers still prefer to buy rather than lease. CPAs can help clients decide whether to lease or buy by advising them on the fairness of lease fees, dealer profit, the relevance and reliability of lease data and the overall desirability of leasing vs. buying. Financial managers in business and industry also may use such information in their capital budgeting decisions. CPAs and their clients should be aware that dealer profit is highly negotiable NEGOTIABLE. That which is capable of being transferred by assignment; a thing, the title to which may be transferred by a sale and indorsement or delivery. 2. and often is a function of the dealership and leasing company selected as well as dealer add-ons such as rustproofing rustproofing n → traitement m antirouille rustproofing rust n → Rostschutz m rustproofing n → , extended warranty The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. , custom detailing, lease options and financing alternatives. As CPAs identify new assurance services Assurance services have been defined by the American Institute of Certified Public Accountants (AICPA) as 'Independent Professional Services that improve information quality or its context'. and develop new competencies, a client-focused mind-set will enable them to offer independent professional services (job) professional services - A department of a supplier providing consultancy and programming manpower for the supplier's products. that improve the quality of available information. Although leasing assurance is not one of the original six services outlined by the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). assurance services committee, consultation on leasing vs. buying should be considered on a future list of expanded assurance services. The evidence provided here indicates leasing generally saves money and gives consumers an opportunity to drive nicer, newer cars than they otherwise could afford. Buying, on the other hand, minimizes risk and retains equity. To help clients make the best choice, CPAs need tools that will help them understand the terms, preferences, calculations and cash flows of the auto lease vs. buy decision. The information outlined here provides the elements necessary for a complete `toolbox,' including background information on terminology, strategies from an auto dealer and other key factors. The dealership tips give CPAs valuable insight into auto industry trade issues affecting lease transactions. A spreadsheet spreadsheet Computer software that allows the user to enter columns and rows of numbers in a ledgerlike format. Any cell of the ledger may contain either data or a formula that describes the value that should be inserted therein based on the values in other cells. framework for the lease-buy decision provides capital budgeting advice. TRUTH IN LEASING The truth is, dealers have profited more from leasing than from financing. An Atlanta-based leasing expert says, "On a sale, a dealer makes about $1,200 to $1,500 in profit. On a lease, it might be $2,500 to $3,000." That's fine, he notes, "unless it's done deceptively de·cep·tive·ly adv. In a deceptive or deceiving manner; so as to deceive. Usage Note: When deceptively is used to modify an adjective, the meaning is often unclear. ." Complex lease contracts combined with hidden costs complicate com·pli·cate tr. & intr.v. com·pli·cat·ed, com·pli·cat·ing, com·pli·cates 1. To make or become complex or perplexing. 2. To twist or become twisted together. adj. 1. the decision to lease or buy. Only recently have key lease terms such as the cost of the car been disclosed to consumers. Laws in a handful of states, as well as Federal Reserve Board Regulation M, which became effective in October October: see month. 1997, and leasing data available on the Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the are prompting dealers to make increased disclosures. Unfortunately, some fees, including the interest rate the dealer uses to calculate the lease payment, known in the industry as the money factor, still remain unknown to the consumer. Lease transactions generally are conducted in a language foreign to many consumers. A healthy familiarity with lease jargon jargon, pejorative term applied to speech or writing that is considered meaningless, unintelligible, or ugly. In one sense the term is applied to the special language of a profession, which may be unnecessarily complicated, e.g., "medical jargon. , lease calculations and decision analysis is necessary to make a truly informed decision. Many of the critical terms (cap cost, charges included in the monthly payment and the lease-end residual value Residual value Usually refers to the value of a lessor's property at the time the lease expires. residual value The price at which a fixed asset is expected to be sold at the end of its useful life. ) now are disclosed in an easy-to-read format as a result of Regulation M. The glossary A term used by Microsoft Word and adopted by other word processors for the list of shorthand, keyboard macros created by a particular user. See glossaries in this publication and The Computer Glossary. on page 27 explains the terms in a typical contract. When a consumer signs an auto lease, the dealership sells the vehicle to a leasing company. The lease is a contract between the consumer and the car's new owner, the leasing company. The dealership acts as an agent. When the lease is signed, the car dealer profits in four possible ways: * Seasonal rebates (dealer incentives) from the manufacturer, which average $500 to $1,000 per vehicle. * "Holdbacks" or credits remitted on a quarterly basis from the manufacturer, which average $500 per vehicle. * Selling the vehicle to the leasing company. * Financial incentives from the leasing company, such as a reduction in consumer credit criteria criteria (krītēr´ē  ),n. to boost lease transactions or a waiver The voluntary surrender of a known right; conduct supporting an inference that a particular right has been relinquished. The term waiver is used in many legal contexts. of leasing fees the dealer can retain. Increased disclosure of lease components is becoming more prevalent prevalent widespread occurrence. , although details on the interest rate and its impact on the consumer usually are excluded. In the last year, five major leasing companies announced they would voluntarily report other lease charges, including title, registration, tag and security fees, first payment and local sales taxes sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. . Auto industry representatives successfully lobbied against requiring disclosure of the money factor, but most dealers will provide the interest rate and other charges used in the contract if asked. EFFECTIVE LEASE STRATEGIES CPAs need to understand some general lease strategies and industry rules of thumb in order to provide proper assurance to clients in lease-or-buy transactions. The discussion below includes strategies CPAs--and their clients--can follow in negotiating auto leases and evaluating recommendations. To supplement this, the sidebar (1) A Windows Vista desktop panel that holds mini applications (gadgets) such as a calendar, calculator, stock ticker and Vonage phone dialer. It is the Windows counterpart to the Dashboard in the Mac. See Windows Vista and gadget. on page 28 includes strategies provided by Richard Llewellyn Richard Llewellyn (real name Richard David Vivian Llewellyn Lloyd) (December 8, 1906 - November 30, 1983) was a British novelist. Born in Hendon, London in 1906. Only after his death was it discovered that his claim to be born in St. , the CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of Palm Automotive Management, a group of 10 new car franchises in Florida Florida, state, United States Florida (flôr`ĭdə, flŏr`–), state in the extreme SE United States. A long, low peninsula between the Atlantic Ocean (E) and the Gulf of Mexico (W), Florida is bordered by Georgia and . Strategy 1: Consider soft issues up front. CPAs should get to know the client's needs. For some, the car buyer's attraction to leasing or buying is tied to his or her desire to avoid risk, to drive a new car or to own. In many cases, the client is predisposed pre·dis·pose v. pre·dis·posed, pre·dis·pos·ing, pre·dis·pos·es v.tr. 1. a. To make (someone) inclined to something in advance: to make a decision without really considering the dollars involved. CPAs should determine the strength of the client's conviction at the outset. A review of 24 consumer decisions revealed leasing and buying offered moderate differences in cash flow. For some consumers, soft issues--see exhibit 1, page 26--may outweigh out·weigh tr.v. out·weighed, out·weigh·ing, out·weighs 1. To weigh more than. 2. To be more significant than; exceed in value or importance: The benefits outweigh the risks. the cash impact. Exhibit 1: Leasing vs. Buying
Advantages
Factors Buying Leasing
Minimized net cash outflows. (*) (*)
Greater access to new and
high-priced autos. [check]
Gain equity in vehicle and in [check]
improvements such as window tinting or
upgraded hubcaps.
Greater warranty coverage [check]
for life of commitment.
Greater negotiability of excessive mileage [check]
and wear and tear imposed by others;
no early termination fees.
Minimizes ambiguity of commitment (*) (*)
made. (Buyers bear the risk of asset
holding value and lessees bear the risk
of unknown lessor-imposed penalties
and undisclosed/inflated fees.)
(*) This factor can be an advantage in buying or leasing, depending on the circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Strategy 2: Save some money by leasing. Although lease payments generally are more affordable than loan payments, front- and back-end (programming) back-end - Any software performing either the final stage in a process, or a task not apparent to the user. A common usage is in a compiler. A compiler's back-end generates machine language and performs optimisations specific to the machine's architecture. charges mean clients should look at total cash flows to determine whether leasing truly saves money. In 14 of 24 three-year leases, total cash savings ranged from $66 to $3,488 and averaged $1,272. The message is clear: Savings from leasing are moderate and may not be the deciding factor. Nonmonetary consider-actions may outweigh monetary ones; does the consumer want to drive a nicer, newer car than he or she could otherwise afford, or does the consumer want equity in the vehicle? Leasing does not make sense if the client intends to drive the car for 10 years. Consumer leasing offers no tax advantages. If the client uses the car for business, however, CPAs should incorporate the tax consequences (for example, tax savings from the deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). portion of lease payments or depreciation if buying) into the cash flows. Strategy 3: Lease cars that retain their value. Because lessees borrow a vehicle and pay for the portion of the car's value they use, it's wise to select one that retains its value. For example, consider Carl's choice of leasing a 1998 Mercedes Mercedes (mĕrsā`thēs), city (1996 pop. 39,139), capital of Soriano dept., SW Uruguay, a port on the Río Negro. An agricultural and livestock center, the city has a shipyard and several fine beaches and resorts. vs. a 1998 Cadillac Seville The Cadillac Seville is a luxury car that was manufactured occasionally by the Cadillac division of American automaker General Motors as a specialty model in the 1950s and 60s, and a regular production vehicle from 1975 to 2004. for 36 months, at an interest rate of 9.12% and no down payment. The 1998 Mercedes E Class Sedan retailed for $48,140, with a lease residual Residual See:Residual value of 61% (lease end value of $29,365). The 1998 Cadillac Seville SLS (Selective Laser Sintering) See laser sintering and 3D printing. Sedan retailed for $44,000, with a lease residual of 50%. The Mercedes leases for less money. Why? It retains its value (an 11% higher residual). Leasing the Mercedes saves Carl $1,651 in total lease payments (36 months at $45.87 per month). Carl uses a smaller portion of the Mercedes's value and pays less for the lease. Strategy 4: Resist the allure of lower lease payments. Payments to lease a car are almost always lower than payments to buy the same vehicle, because leases charge only for the portion used (cap cost minus residual). A lower lease payment does not necessarily mean a good deal. Lease payments should be lower than buy payments proportional proportional values expressed as a proportion of the total number of values in a series. proportional dwarf the patient is a miniature without disproportionate reductions or enlargements of body parts. to the lease residual. For example, Jordan Jordan, country, Asia Jordan, officially Hashemite Kingdom of Jordan, kingdom (2005 est. pop. 5,760,000), 35,637 sq mi (92,300 sq km), SW Asia. It borders on Israel and the West Bank in the west, on Syria in the north, on Iraq in the northeast, and on Saudi wanted a 1998 Jeep Grand Cherokee The Jeep Grand Cherokee is a mid-size sport utility vehicle produced by the Jeep division of DaimlerChrysler. European Grand Cherokees are manufactured in Austria by Magna Steyr. Development The Grand Cherokee was a spinoff of the smaller Jeep Cherokee. Laredo Laredo (lərā`dō), city (1990 pop. 122,899), seat of Webb co., S Tex., on the Rio Grande; founded 1755, inc. 1852. It is a port of entry on the U.S.-Mexican border, with a thriving export-import trade and a tourist industry. , which costs $25,300, with zero down, 7.2% interest, payments due monthly over three years, and a lease-end residual of $15,600. Her projected monthly lease and purchase payments are Purchase payment $784 (due at end of month) Lease payment $392 (due at beginning of month) Lease savings $392 (50% of purchase payments) Jordan's lease payments would be 50% lower than the purchase payments because the present value of the residual, $12,578 (50% of the purchase cost), is subtracted from the lease cost. Strategy 5: Choose the right auto leasing company. A survey of 22 dealerships found them using from one to seven leasing companies. Dealers are apt to provide consumers with information on a select few companies, often the ones providing the best dealer incentives. They may or may not provide the best terms to the consumer. Reverse the scenario: Ask for the fees (security deposit, acquisition fee, money factor, residual, disposition charge) of all leasing companies the dealer works with, and base your choice on this information. The client also should be encouraged to ask about independent leasing companies, such as Curry Auto Leasing, Direct Leasing, Inc., or Superior Leasing, that minimize dealer contact. In such instances, the client typically provides the leasing company with information about the car desired and negotiates lease terms. The independent company then locates a dealership to provide the vehicle the consumer wants. Strategy 6: Know the lease payment calculation used by the industry. The auto leasing industry uses a payment calculation that approximates, within a dollar, the familiar academic version used in textbooks and on financial calculators. Traditional time-value-of-money calculations are replaced with the industry version: average interest and straight-line straight-line adj. 1. Lying in a straight line. 2. Relating to a device whose linkage produces or copies motion in straight lines. 3. principal amortization. To calculate the industry method, assume a vehicle cost, net of down payment, of $27,186.04, a residual of $17,976.75, an interest rate of 6.24% and a 36-month term. The industry method is illustrated in exhibit 2, below. Exhibit 2: Auto Industry Lease Payment Calculation The auto industry lease payment involves straight-line principal and average interest calculations. To illustrate, assume a $27,186.04 cap cost net of down payment, $17,976.75 residual, .00260 money factor (6.24%), and 36-month term. Industry payment calculation: 1. Depreciation charge: (Cap cost - Residual)/Term = ($27,186.04 - $17,976.75)/36 = $255,82 2. Lease charge: (Cap cost + Residual) x Money factor = ($27,186.04 + $17,976.75) .00260 = $117.42 1 + 2 = Dealer's lease payment quote without tax = $373.24 The 1 depreciation charge represents a straight-line monthly principle payment. The 2 lease charge represents an average monthly interest payment. The averaging of the lease charge is illustrated in a two-step process: Step 1: Convert money factor to average monthly interest rate Money factor x 2,400 = annual interest rate % = .00260 x 2,400 = 6.24% Money factor x 1,200 = 1/2 annual interest rate % = .00260 x 1,200 = 3.12% Money factor x 100 = 1/2 monthly interest rate % = .00260 x 100 = 0.26% Money factor = 1/2 monthly interest rate = .00260 = 0.0026 Step 2: Substitute average monthly interest rate for money factor in lease charge (Cap cost + Residual) x Money factor = ($27,186.04 + $17,976.75) x .002 = $117.42 (Cap cost + Residual) x 1/2 monthly interest rate = ($27,186.04 + $17,976.75) x 1/2 = $117.42 (Cap cost + Residual) 1/2 x monthly interest rate = ($27,186.04+$17,976.75)1/2 x .005 =$117.42 (Average balance owed) x monthly interest rate = ($22,581.40) x .00520 = $117.42 The industry lease payment has two components similar to principal and interest. The $255.82 depreciation charge represents a straight-line monthly principal payment. The $117.24 lease charge represents an average monthly interest payment. The combined industry lease payment of $373.24 is within a dollar of the $372.71 payment a CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. might compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. using the academic method. Dealer lease quotes should agree with industry method calculations. Hidden components affecting monthly payments are avoided, for the most part, because Regulation M requires full disclosure of payment components (except the money factor). Strategy 7: Negotiate the lease payment carefully. Four factors determine a lease payment: cost, residual value, interest and the lease term. The car's cost and residual value have the greatest impact; interest and term have the least. CPAs should be aware that when added to a lease component, dealer profit might appear small when it is divided into monthly payments. Pay attention to the cost and residual (especially the latter, since residuals Residuals (1) Part of stock returns not explained by the explanatory variable (the market index return). Residuals measure the impact of firm-specific events during a particular period. vary widely among leasing companies) and avoid quibbling over interest rate and term. Exhibit 3, page 30, shows the sensitivity of lease payments to a change in lease terms. Exhibit 3: Lease Payment Sensitivity Lease Component Lease Payment This exhibit describes the changes Amount in a $330 lease payment when the cap cost, residual, money factor or lease term increases ([arrow up]) by 1%, 5%, and 25% while the other components are held constant. In reality, the residual, money factor and term are interrelated and do not stay constant (for example, the residual is lowered when the term is extended). Cap cost--down payment ($27,186) $330.00 1% [arrow up] ($27,458) $337.55 5% [arrow up] ($28,545) $367.76 25% [arrow up] ($33,983) $518.79 Residual ($20,819) $330.00 1% [arrow up] ($21,027) $324.88 5% [arrow up] ($21,860) $304.40 25% [arrow up] ($26,024) $202.02 Money factor (.00319) = Interest rate (7.66%) $330.00 1% [arrow up] (.00322) = interest (7.73%) $331.53 5% [arrow up] (.00335) = interest (8.04%) $337.65 25% [arrow up] (.00399) = interest (9.58%) $368.28 Term of lease (36 months) $330.00 1% [arrow up] (36.4) $328.25 5% [arrow up] (37.8) $321.58 25% [arrow up] (45.0) $294.62 Lease Component This exhibit describes the changes % [Delta] in a $330 lease payment when the cap cost, residual, money factor or lease term increases ([arrow up]) by 1%, 5%, and 25% while the other components are held constant. In reality, the residual, money factor and term are interrelated and do not stay constant (for example, the residual is lowered when the term is extended). Cap cost--down payment ($27,186) 1% [arrow up] ($27,458) 2.29% 5% [arrow up] ($28,545) 6.56 25% [arrow up] ($33,983) 27.93 Residual ($20,819) 1% [arrow up] ($21,027) (1.55) 5% [arrow up] ($21,860) (4.80) 25% [arrow up] ($26,024) (27.54) Money factor (.00319) = Interest rate (7.66%) 1% [arrow up] (.00322) = interest (7.73%) 0.46 5% [arrow up] (.00335) = interest (8.04%) 1.38 25% [arrow up] (.00399) = interest (9.58%) 6.65 Term of lease (36 months) 1% [arrow up] (36.4) (0.53) 5% [arrow up] (37.8) (1.52) 25% [arrow up] (45.0) (6.15) Strategy 8: Make sure the car costs the same for purchase or for lease. The negotiated price of the vehicle should be the same, whether the consumer is leasing or buying. Clients should negotiate the purchase price first to establish the value used in lease calculations. Avoid the financial bait-and-switch, or "flip," as it is known by sales personnel, in which the dealer imposes a higher lease price after negotiating the purchase price. Dealers generally lose money on new cars and make up for it on used cars and in service centers. Because dealers make relatively little profit on purchase or lease transactions, one way for clients to gain leverage and perhaps a better lease deal is to capitalize on Cap´i`tal`ize on` v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. their loyalty to the dealership. Lease negotiations should include the offer of a few "carrots" of anticipated service work with the dealership and the prospect of repeat business. Strategy 9: Take advantage of inflated residuals. Residuals quoted by leasing companies on 24 consumer lease-buy decisions surveyed in 1998 averaged 16% above lease--end residuals published in the industry-recognized Automotive Lease Guide--1998 Residual Percentage Guide. For example, a published residual for a given car at 44% is quoted by leasing companies, on average, at 51%. Inflated residuals lower the monthly payment and may raise the stated lease-end purchase value. Leasing companies often raise residuals as a marketing strategy to attract more customers. Clients are wise to consider a high residual, bank the savings in monthly payments and decline to buy at lease end if the leasing company will not renegotiate re·ne·go·ti·ate tr.v. re·ne·go·ti·at·ed, re·ne·go·ti·at·ing, re·ne·go·ti·ates 1. To negotiate anew. 2. To revise the terms of (a contract) so as to limit or regain excess profits gained by the contractor. the purchase price to conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" current market value at lease end. Strategy 10: Make sure the lease term matches the driver's needs. Encourage clients to avoid leases with terms longer than needed. Early termination costs money. Some leases require consumers to pay the difference between market value and lease balance, a termination fee termination fee The one-time charge for terminating or transferring an individual retirement account. If a financial institution charges a termination fee, the fee must be spelled out in the original agreement that is signed when the account is opened. (averaging $200 to $400) or the remaining lease in full. Regulation M mandates that consumers be warned that early termination costs "may be up to several thousand dollars." Strategy 11: Monitor lease-signing fees. Consumers should request a full itemization i·tem·ize v. i·tem·ized, i·tem·iz·ing, i·tem·iz·es v.tr. 1. To place or include on a list of items: itemized her expenses on the proper form. 2. of lease-signing fees. Regulation M requires disclosure of the down payment, security deposit and totals paid for taxes, insurance and lessor One who rents real property or Personal Property to another. A lessor of land is a landlord. Cross-references Landlord and Tenant. lessor n. the owner of real property who rents it to a lessee pursuant to a written lease. charges. A survey of 22 Florida dealers revealed the following range of fees due at signing: * Florida license tag ($56 to $185). * Lease acquisition fee (leasing company fee ranging from $300 to $600). * Security deposit (first month's rent). * Administrative fee (5 dealers imposed fees of $100 to $250). * Florida rental fee ($60 required by Florida law The jurisprudence of this state offers major differences from doctrines prevailing in the United States at either the federal level or that of the various states. Homestead exemption from forced sale, the dangerous instrumentality doctrine, the right to privacy, and the Williams ). * Tire-battery fee ($6.50 required by Florida law). * Lemon law lemon law n. statutes adopted in some states to make it easier for a buyer of a new vehicle to sue for damages or replacement if the dealer or manufacturer cannot make it run properly after a reasonable number of attempts to fix the car. ($2 required by Florida law). Excessive charges beyond these customary fees customary fee, n the fee level determined by the administrator of a dental benefits plan from actual submitted fees for a specific dental procedure to establish the maximum benefit payable under a given plan for that specific procedure. point to dealer profit that clients can sidestep side·step v. side·stepped, side·step·ping, side·steps v.intr. 1. To step aside: sidestepped to make way for the runner. 2. . Avoid paying surcharges such as administrative fees. Dealers typically refund TO REFUND. To pay back by the party who has received it, to the party who has paid it, money which ought not to have been paid. 2. On a deficiency of assets, executors and administrators cum testamento annexo, are entitled to have refunded to them legacies overcharges only at the consumer's request. Strategy 12: Try to avoid lease-end penalties. Clients should be encouraged to avoid paying excess up-front up-front or up·front Informal adj. 1. Straightforward; frank. 2. Paid or due in advance: up-front cash. adv. mileage MILEAGE. A compensation allowed by law to officers, for their trouble and expenses in travelling on public business. 2. The mileage allowed to members of congress, is eight dollars for every twenty miles of estimated distance, by the most usual roads, from his fees--the charges dealers impose for odometer odometer (ōdŏm`ĭtər), instrument provided in an automotive vehicle to indicate the total number of miles that have been traveled. readings greater than 12,000 or 15,000 miles annually--unless anticipated usage is heavy. At lease-end, clients can avoid having to pay excess mileage charges or penalties for excessive wear and tear by trading in the vehicle or buying it outright. Strategy 13: Determine the lessee's equity. Clients should avoid returning the car to the original dealership without first doing some homework by obtaining three alternative trade quotes on the vehicle at lease-end to determine the extent of the lessee's equity. Equity is created when the consumer has the right to buy the car at a price lower than the current market or trade value. If the consumer trades the car, the trade equity (net of any sales taxes imposed) is applied against the purchase price of the new car to create a cash savings on the new car purchase. WHERE DO I SIGN? After negotiating both the lease and buy terms and assessing the reasonableness of dealer profit, CPAs and financial managers should advise their clients or employers on whether to lease or buy using capital budgeting techniques. This spreadsheet analysis uses a net-present-value method to evaluate the best option. Cash flows are discounted using the quoted lease-buy rate for payment calculations and the consumer's aftertax savings rate Savings rate Personal savings as a percentage of disposable personal income. (assumed to be 5%) for all others. This is because dealer payment calculations use the dealer's discount rate while all other cash flows are affected by the consumer's discount rate. The money factor quoted by the dealership is converted to an annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. interest rate (see exhibit 2) for use as the lease rate. Comparing the net-present-value cash flows shows which alternative saves money. Tax consequences are not included in the consumer lease-buy illustrations described below. If the auto is used for business purposes, CPAs and financial managers should incorporate additional tax issues into the decision framework. Exhibit 4, page 33, illustrates the cash flows associated with purchasing or leasing a 1998 Chrysler Chrys·ler , Walter Percy 1875-1940. American automobile manufacturer who founded the Chrysler Corporation (1925). Town & Country LXI Adj. 1. lxi - being one more than sixty 61, sixty-one cardinal - being or denoting a numerical quantity but not order; "cardinal numbers" minivan. The values come from an actual lease-buy negotiation with a dealer. In this case, the net-present-value analysis shows leasing saves $2,193.57 over buying. The analysis assumes the money saved in lower lease payments is invested at 5% interest (10% return less 5% opportunity cost of capital) over the life of the lease. However, if excess cash is unavailable, this element of the analysis should be ignored. As such, lease savings may be as low as $967.72. The cash savings and the less tangible soft issues described earlier should guide the decision to lease or buy. Exhibit 4: Leasing vs. Buying Cash Flow Analysis
Costs or (Revenues) Buy
Auto cost (1998 Chrysler Town & Country
LXI, $32,685 MSRP)
1 Negotiated cost of car (purchase price
or cap cost) $30,400.00
Additional costs
2 Cash down payment or trade (negotiable) $3,213.96
3 Fees paid in cash up front
* Tag and "fees" (profit hidden here-amount
should be < $170) $225.29
* Documentary stamps $114.40
* Lease acquisition fee
* Security deposit
4 Present value of sales tax paid (varies
by state--6% used here) $1,824.00
Assessed on portion of vehicle paid
for by consumer
* Buy: [(1) x 6%]
* Lease: [(2) x 6%] + [PVAD(1) of {(10) x 6%}]
Monthly costs
5 Residual value (dealership quote of 55% of MSRP)
6 Interest rate (convert the money
factor to an interest rate)
money factor quoted at .00260 x 2400 = 6.24% 9.00%
7 Cost of capital (after tax-saving rate) 5.00%
8 Term 36 months
9 Loan payment: $864.51
payment x PVA = (purchase price - down payment)
= [(1) - (2)]/PVA
10 Dealer's lease payment quote
(excluding sales tax)
11 Industry calculation [used for
reasonableness of (10)]
12 Present value of payments: [PVA of (9)]
or [PVAD of (10)] $27,186.04
Other costs (Revenues)
13 Present value of interest earned
on savings in lease payment(2)
[PVAD of {(9) - (10)}] - [{(9) - (10)} x (8)]
14 Present value of refunded
security (that is, deducting
forgone interest) PV of $425
15 Present value of lease disposition charge
PV of $275
Cost after 36 months
(2 + 3 + 4 + 12 + 13 + 14 + 15) $32,563.69
Less present value of trade-equity
($16,342.50) in 36 months(3) $14,070.50
Your total cost $18,493.19
Lease savings
Costs or (Revenues) Lease
Auto cost (1998 Chrysler Town & Country
LXI, $32,685 MSRP)
1 Negotiated cost of car (purchase price
or cap cost) $30,400.00
Additional costs
2 Cash down payment or trade (negotiable) $3,213.96
3 Fees paid in cash up front
* Tag and "fees" (profit hidden here-amount
should be < $170) $288.89
* Documentary stamps
* Lease acquisition fee $495.00
* Security deposit $425.00
4 Present value of sales tax paid (varies
by state--6% used here) $943.16
Assessed on portion of vehicle paid
for by consumer
* Buy: [(1) x 6%]
* Lease: [(2) x 6%] + [PVAD(1) of {(10) x 6%}]
Monthly costs
5 Residual value (dealership quote of 55% of MSRP) $17,976.75
6 Interest rate (convert the money
factor to an interest rate)
money factor quoted at .00260 x 2400 = 6.24% 6.24%
7 Cost of capital (after tax-saving rate) 5.00%
8 Term 36 months
9 Loan payment:
payment x PVA = (purchase price - down payment)
= [(1) - (2)]/PVA
10 Dealer's lease payment quote
(excluding sales tax) $373.24
11 Industry calculation [used for
reasonableness of (10)] $373.24
12 Present value of payments: [PVA of (9)]
or [PVAD of (10)] $12,288.60
Other costs (Revenues)
13 Present value of interest earned
on savings in lease payment(2)
[PVAD of {(9) - (10)}] - [{(9) - (10)} x (8)] ($1,225.85)
14 Present value of refunded
security (that is, deducting
forgone interest) PV of $425 ($365.91)
15 Present value of lease disposition charge
PV of $275 $236.77
Cost after 36 months
(2 + 3 + 4 + 12 + 13 + 14 + 15) $16,299.62
Less present value of trade-equity
($16,342.50) in 36 months(3)
Your total cost $16,299.62
Lease savings $2,193.57
(1) PV denotes present value, A = annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. and D = due. 2 Cash flow differences between the buy-lease alternatives create opportunities for interest savings, The most significant difference is identified here; others (such as up-front fees) are ignored for simplification. 3 The trade-equity (residual) represents the industry recognized three-year residual published in the Automotive Leasing Guide--1998 Residual Percentage Guide. The May 1998 residual for this auto was 50% of the MSRP MSRP Manufacturer's Suggested Retail Price MSRP Message Session Relay Protocol MSRP Multi-Species Recovery Plan (US Fish & Wildlife Service) MSRP Member of the Society for Radiological Protection (UK) . Avoid using the residual value quoted by the dealer. SELLING THE SERVICE Many clients compare a visit to an auto dealer to buy or lease a car with a trip to the dentist "A Trip to the Dentist" is episode 21 of season 1 of the television show Veronica Mars. Plot Veronica finally investigates what happened to her the night of Shelly Pomroy's party where she was drugged and date-raped and what she finds out is shocking. . Regular visits are necessary, but not eagerly anticipated. As a result, CPAs may find their offer of independent, objective and informed help with lease negotiations and purchase decisions an easy sale. Most of a CPA firm's existing clients will need such help at least every two or three years. In addition, the service can be marketed outside the firm's existing client base using traditional direct mail campaigns, ads in auto-related publications or on Internet Web sites or even by renting a booth at a local auto show An auto show, or motor show, is a public exhibition of current automobile models, debuts, concept cars, or out-of-production classics. It is commonly attended by automobile manufacturers. Most auto shows occur once or twice a year. . NEW ASSURANCE SERVICE Armed with the financial analysis skills needed to do the job, CPAs are uniquely qualified to provide clients with assurances on auto leasing vs. buying. Automobile automobile, self-propelled vehicle used for travel on land. The term is commonly applied to a four-wheeled vehicle designed to carry two to six passengers and a limited amount of cargo, as contrasted with a truck, which is designed primarily for the transportation of consumers and the CPAs who advise them should consider both quantitative and qualitative qualitative /qual·i·ta·tive/ (kwahl´i-ta?tiv) pertaining to quality. Cf. quantitative. qualitative pertaining to observations of a categorical nature, e.g. breed, sex. measures and carefully negotiate all fees, just as when they purchase a home or sign any other contractual obligation. In the end, the ultimate choice to lease or buy involves an informed understanding of the financial and other factors of each alternative. EXECUTIVE SUMMARY * ONE OF EVERY THREE NEW CARS ON THE ROAD is leased, and consumers are confronted frequently with the decision of whether to buy or lease their vehicles. CPAs are in a good position to use their assurance skills to help consumers make this decision, offering advice on the reasonableness or fairness of lease fees, the resulting dealer profit, the relevance and reliability of data and the overall advisability ad·vis·a·ble adj. Worthy of being recommended or suggested; prudent. ad·vis  a·bil of
leasing or buying.* LEASING TRANSACTIONS REMAIN COMPLICATED. Only recently have the meanings of key lease terms been disclosed to consumers, some as the result of Federal Reserve Board Regulation M, effective as of October 1997. Some fees, including the interest rate (money factor), generally remain unknown unless the consumer asks. * CPAs AND THEIR CLIENTS CAN USE ANY OF A NUMBER of strategies to make negotiating the purchase or lease of a vehicle easier. While leasing generally saves money, it's important to consider other factors--some of them unrelated to cost--in deciding whether to buy or lease a car. * TO HELP CONSUMERS MAKE THE BUY-OR-LEASE decision, CPAs can apply capital budgeting techniques. If appropriate, tax consequences should be considered as well. Auto Leasing Resources on the Internet Background and advice www.leasesource.com/ Long list of links, including international information www.autoguide.net/finance/leasing.html Independent leasing www.autoflex.com/ autobytel Autobytel, Inc. NASDAQ: ABTL is an Irvine, California, company and the largest online automotive marketplaces. Autobytel owns and operates websites including Autobytel.com, myRide.com, Autoweb.com, CarSmart.com, Car.com, and CarTV.com which facilitate car-shopping decisions. .com/Se/Ly/autoleasing.html Used car leasing www.advernet.com/aboutus/linc.html Auto Leasing Glossary
Typically
Terms Disclosed?
Up-front lease issues
Lessor [check]
Lessee [check]
Lease payments issues
Cap cost [check]
Cap cost reduction [check]
Residual [check]
Money factor
Term [check]
Depreciation charge [check]
Lease charge [check]
Sales tax charge [check]
End-of-lease issues
Open-ended lease [check]
Close-ended lease [check]
Purchase option [check]
Security deposit [check]
Gap insurance [check]
Excess mileage charges [check]
Excess wear and tear [check]
charge
Early termination [check]
Other terms
MSRP [check]
APR
Terms Meaning
Up-front lease issues
Lessor The leasing company to which the car
dealership assigns the rights to the
contract.
Lessee Consumer.
Lease payments issues
Cap cost The cost of the car to be leased. May
include the selling price and additional
fees capitalized; disclosure of the cap
cost may not be itemized.
Cap cost reduction The cash paid up front to reduce
payments.
Residual The fixed future value of the car at
lease end.
Money factor The interest factor -- quoted as a
decimal such as .0031. Easily converted to
an annual interest rate by multiplying by
2,400 (.0031 x 2400 = 7.44%). The money
factor is half the monthly interest rate.
Term The number of months covered under
the lease.
Depreciation charge The portion of the payment reducing the
principal lease obligation.
Lease charge The portion of the payment covering
interest.
Sales tax charge The portion of the payment covering sales
tax.
End-of-lease issues
Open-ended lease Lessee guarantees the value of the
car at lease end.
Close-ended lease Lessee does not guarantee the residual
amount.
Purchase option Option to buy at lease end.
Security deposit Good-faith payment guaranteeing at lease
end the proper condition of a vehicle
that may (not) be returned. Averages one
month's lease payment.
Gap insurance Coverage of the "gap" between the
insurance policy proceeds and the lease
balance owed if the car is stolen or
destroyed. Doesn't reimburse cash outlays
made. May be free or cost $200 to $400.
Excess mileage charges Payment at lease end for decreased
residual value (usually around 10 cents
per mile).
Excess wear and tear Same as above.
charge
Early termination Terminating the lease contract before
its full term.
Other terms
MSRP Manufacturer's suggested retail price.
APR Annual percentage interest rate.
RELATED ARTICLE: Additional Strategies from an Auto Dealer Here is more information on some of the topics discussed in the text provided by auto dealer Richard Llewellyn. Strategy 1: Consider soft issues up front. Leasing minimizes the risks associated with driving a car because leased cars often have "gap" insurance protecting against collision See CSMA/CD and collision avoidance system. Collision (physics) Any interaction between particles, aggregates of particles, or rigid bodies in which they come near enough to exert a mutual influence, generally with exchange of energy. and theft losses. At lease end, the consumer walks away from the lease if the lease buyout Buyout The purchase of a company or a controlling interest of a corporation's shares. Notes: A leveraged buyout is accomplished with borrowed money or by issuing more stock. is too high or receives equity back through trade or purchase if the lease buyout is low. Strategy 5: Choose the right auto leasing company. Leasing companies must provide the same quotes to all dealers within a region. For example, World Omni, a leasing company, must quote the same residual, money factor and acquisition fee to all dealers. Dealers have no contractual obligation to pass the same terms along to consumers. This permits undisclosed dealer add-ons, but market and competitive forces minimize abuses. Quotes among lease companies will vary due to different actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin assumptions employed. Strategy 8: Make sure auto cost is the same for purchase or lease. On average, dealers lose money in the new car sales-leases department (due to high sales commission costs) but make up for the losses in other areas (used cars, body shop, parts and service). Strategy 11: Monitor lease-signing fees. Leasing companies may lower the lease security deposit or money factor as a dealer incentive. The dealership may or may not pass the savings along to the consumer. The disclosed security deposit may be paid to the leasing company or retained by the dealership as profit. As an example, dealers that advertise "autos at zero above cost" may fail to mention $875 in administrative fees (dealer profit) charged at lease signing. Scrutinize scru·ti·nize tr.v. scru·ti·nized, scru·ti·niz·ing, scru·ti·niz·es To examine or observe with great care; inspect critically. scru total costs carefully. Strategy 12: Try to avoid lease-end penalties. There are no penalties if the leasing company does not get the car back. Under this scenario, someone buys the car, either the dealership through a trade or the consumer through a purchase. The new owner bears the risk of excess mileage and wear and tear. DEANNA Meaning of the name, Deanna. Deanna, (pronounced DEE-anna or DEE-na) is a female first name of Latin and Old English origin. In Latin origins, it means 'Divine', but in Old English, it means 'Girl From The Valley'. OXENDER BURGESS BURGESS. A magistrate of a borough; generally, the chief officer of the corporation, who performs, within the borough, the same kind of duties which a mayor does in a city. In England, the word is sometimes applied to all the inhabitants of a borough, who are called burgesses sometimes it , CPA, PhD, is assistant professor of accounting at Florida Gulf Coast University About FGCU History The newest university in the State University System of Florida, the school was established by then-governor Lawton Chiles in 1991, although the site of the university wasn't chosen until 1992, and construction pushed back even further still (until , Fort Myers Fort Myers, city (1990 pop. 45,206), seat of Lee co., SW Fla., on the Caloosahatchee River, near the Gulf of Mexico; founded 1850, inc. 1905. It has a tourist trade and light industry and is a shipping point for citrus fruits, winter vegetables, flowers (especially . Her e-mail address See Internet address. e-mail address - electronic mail address is dburgess@fgcu.edu See .edu. (networking) edu - ("education") The top-level domain for educational establishments in the USA (and some other countries). E.g. "mit.edu". The UK equivalent is "ac.uk". . |
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