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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Leasing

Internet Application Questions

There are some very sensible reasons for leasing assets, and some that make you think deeper. The following site argues mostly in favour of leasing. One of its arguments is that since leasing payments are typically lower than loan payments on a purchase, the "savings" can be invested in higher yield instruments such as equity funds, and you therefore come out ahead at the end of the term. Is this a reasonable criticism of the borrow-and-buy alternative to leasing?
http://www.leaseguide.com/lease03.htm

Here's a more detailed analysis of the economics of leasing cars. This article explodes five myths that have developed around car leasing.
http://www.findarticles.com/m0BUZ/1999_Annual/56203066/p1/article.jhtml

OK, are you ready for a test drive? CARS4U.COM provides a unique Internet-based car buying and leasing service where they will deliver the car of your choice to your doorstep (well, driveway). Look at the information for the VW Jetta below and decide whether the lease is preferable to financing and purchasing. To get the interest rate, add one percent to the current prime rate from Royal Bank. Leasing and financing assumptions are provided below and in the link.

Term:	36 months
Cash down payment:	$2,500
Trade-in allowance:	$0
Interest rate:	Current market rate
Lease only:	40% Residual Value/Buyback
2001 Volkswagen Jetta GL
MSRP:	$21,280
Est. Lease:	$353
Cars4U.com Price:	$20,594
Est. Financing:	$527
Rebate:	TBA
Vehicle Type:	Sedan
Engine:	1984 cc 2.0 liters in-line 4 engine with 82.5 mm bore, 92.8 mm stroke, 10.0 compression ratio, overhead cam and two valves per cylinder
Fuel Economy:	City:24 Highway:34

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