Leasing as a hedging strategy Part 2- alphaleasing.com
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Leasing as a Hedging Strategy
 Automobiles are a large investment for most people


"Purchase assets that increase in value and lease assets that decrease in value"
Part 1: Introduction
Part 2: Keep Vehicle: Value> Residual
Part 3: Keep Vehicle: Value = Residual
Part 4: Keep Vehicle: Value < Residual
Part 5: Sell Vehicle:  Value > Residual
Part 6: Sell Vehicle: Value = Residual
Part 7: Sell Vehicle: Value < Residual
Part 8: Conclusion

Part 2 of 8: Keep Vehicle - Value is Greater than Residual

In this scenario, at the end of the 4-year evaluation period, you want to keep the vehicle.  So, if you had purchased the vehicle, you do nothing, and if you leased the vehicle, you will purchase the vehicle at the end of the lease period for the residual value.  We will assume that the residual value is $15,000 but the vehicle has an actual value of $17,000.

Let's assume that if you purchase the vehicle you will finance the purchase.  The costs to purchase are shown in Table 1.  You will have a down payment of $602.48 plus 48 monthly payments of $693.40 each.  Your total cost to purchase would be $33,885.68.
The cost to lease are shown in table 2.  You will have an initial lease fee of $602.48 which includes the first payment.  You will have 47 additional lease payments of $404.98 for total payments of $19,636.54.  We then assume that you buy the vehicle at the end of lease for the residual amount of $15,000.  You have now spent a total of $34,636.54. 

However with the lease you will have excess cash each month.  Your monthly loan payment is $693.40 but your monthly lease payment is only $404.98.  If you lease, you will have $288.42 in extra cash each month.  We assume that instead of spending the money, you invest it in something conservative like a money market fund and earn 3% interest.  If you do this, you will earn $799.34 in interest over the 4-year period, which reduces the total cost to lease to $33,837.20. 

The cost to lease of $33,837.20  and the cost to purchase of $33,885.68 are basically dead even.  Please note that the buyout at the end of the lease is $15,000 even though the value of the vehicle is $17,000.  It wouldn't matter if the value of the vehicle was $30,000; remember in a close-end lease the residual is set at the beginning of the lease.  This is one of the major advantages of leasing.

Table 1:  Total Cost to Purchase
Down Payment $       602.48
48 Loan Payments @ $693.40 $  33,283.20
Total Cost to Purchase $33,885.68
 

Table 2:  Total Cost to Lease
Initial Lease Fee $       602.48
47 Lease Payments @ $404.98 $  19,034.06
Subtotals $  19,636.54
Residual at End of Lease $  15,000.00
Subtotal $  34,636.54
Less: Interest on Invested Cash $       799.34
Total Cost to Lease $33,837.20

Summary
Under this scenario, the results are the same.  Neither leasing nor purchasing has an advantage.  In general, anytime the value is greater than the residual and you want to purchase the vehicle, leasing and purchasing should be about equal.
Part 3:  Keep the Vehicle: Value is equal to the residual.

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