Leasing as a hedging strategy Part 6- 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 6 of 8: Sell Vehicle - Value is Equal to the Residual

In this scenario, at the end of the 4-year evaluation period, you do not want to keep the vehicle.  So, if you had purchased the vehicle you will will need to sell it, and if you leased the vehicle you will just turn it in at the end of the lease.  The vehicle has a current value of $15,000, which is equal to the residual of $15,000. 

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.  We estimate that you will incur $500 in expenses when you sell the vehicle.  This would include minor repairs, advertising, finder's fees, etc.  You sell the vehicle for $15,000.  Your total net cost to purchase would be $19,385.68.
   
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. 

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 $18,837.20. 

Since you don't want to keep the vehicle, and the value isn't greater than the residual, you just turn in the vehicle at the end of the lease period. 

The total cost to purchase is $19,385.68 and the total cost to lease is $18,837.20.  When you purchase under this scenario, you are basically out the selling fees associated with getting rid of your vehicle, plus the time and hassles involved.

Table 1:  Total Cost to Purchase
Down Payment $       602.48
48 Loan Payments @ $693.40 $  33,283.20
Less: Selling Price of Vehicle $  17,000.00
Selling Fees $        500.00
Total Cost to Purchase $19,385.68
 

Table 2:  Total Cost to Lease
Initial Lease Fee $       602.48
47 Lease Payments @ $404.98 $  19,034.06
Subtotals $  19,636.54
Less: Interest on Invested Cash $       799.34
Total Cost to Lease $18,837.20

Summary
Under this scenario, you come ahead if you lease, basically by the cost to sell the vehicle.  However, the main benefit here, is that the lessee does not have to sell the vehicle.  Please remember that it can be a major pain to sell a used vehicle.  One of the reasons that you leased in the first places is that you didn't want to deal with selling the used vehicle.
Part 7:  Sell the Vehicle: Value is Less Than the residual.

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