# [HW 2.4a] Making Sense of Car Leases

One of the significant financial decisions that you’ll likely make at some point is how to evaluate a car lease.  The picture below comes courtesy of my friend who is a car broker.  That means he handles the fun negotiations with a car broker, so that I don’t have to.  In this case, the car below is a new BMW 228.   The suggested retail price is \$43,700, before sales tax.

This is an actual lease proposal from an actual BMW dealer.  Every car dealer that I’ve ever seen uses some version of this screen to price leases.  Behind all this complexity, the way they get from the upfront cost to the monthly lease payment is the =PMT function, because a car lease is just a level payment loan with a future value, called the residual.

The homework assignment is to model out the transaction, presenting the calculations in as clear a fashion as you can.  Narrate the calculations so that a sixth grader could understand them.

You will also want to produce an amortization table, so that you can answer the following questions:

1. What is the undiscounted total of all payments to be made by the lessee under the lease?

2. What is the all in interest rate in the lease from the perspective of the lessor?  Assume that the lessor is a 3rd party, which is buy the vehicle at the Agreed Value.  Hint: do not attempt to argue that there is no interest rate and that leases use a “Money Factor”. That’s car dealer obfuscation at its finest.

3. What is the NPV of the payments made by the lessee?

4. If you lease the car and return it at the end of 39 months, but the value of the car at return is 10% more than the residual (25,783 * 1.10), what is the lender’s lessor’s yield and by how much has it increased?

5. Of the \$569.12 monthly lease payment, the lessor has to remit \$39.16 to the State of California as sales tax.  The remainder of \$522.13 is taxable income to the lessor.  Do you think the lessor’s after tax yield is higher or lower than what you calculated in question 3?

Here’s a link to the full PDF of the quote and car lease proposal.

1. I would expect nothing less of you, Professor, than to get the sport package. And I hope you chose a manual as well.

Liked by 1 person

1. Thanks. I’m cracking up because this wasn’t for my car. I asked him to just send me some random lease run. This is what he sent me.

By the way, the broker’s name is Oren and he works nationwide. He makes buying or leasing a car very easy. I’ve used his company four times now. http://www.authorityauto.com/

Like

what do you mean by “all in interest rate”?

Like

3. The all in interest rate in question 2 is the lessor’s yield (ie XIRR).

Like