What Influences the Desire to Buy a Car - Assignment Example

? Final exam Introduction The decision to lease or buy a car depends on the ability to evaluate the various options and come up with the best possible approach to problem solving. The major challenge for companies is the ability to pay for the car in the short-term, the duration of the contract or engagement and the reasons for the purchase (Daugherty, Chen2, Mattioda, & Grawe, 2009, p. 98). In order to make a decision on whether to lease or buy, the advantages of leasing or buying must be analyzed. In addition, the disadvantages of leasing and buying can be evaluated. For new companies, short-term leasing and purchase of cars can solve the problem because it will lead to increase in the company’s assets rather than liabilities (Parker, 2005, p. 25). The first year of operation, the expansion of the company may be limited because of the evaluation of the cash flows to ascertain profitability of capital purchases. Leasing on a 36 month plan for 2013 ODYSSEY LX Leasing has several advantages that could lead to it being an advantage for the company. According to Parker, leasing has six main advantages that make it possible for businesses to use it as a method of acquisition of services (Parker, 2005, p. 48). Leasing offers chance of 100 percent financing which means that most leases come with a financing plan that makes it possible. The monthly contribution for the service may be cheaper. In fact, from the values obtained in the lease of the cars, it is evident that leasing offers lower monthly charges compared to purchase charges. The second advantage of leasing is the reduction of situations of obsolescence. Vehicles depreciate fast making them obsolete in a couple of years. Thirdly, leasing offers asset flexibility which makes it easy to obtain assets. Total Initial Fees $15.00. Amount Due at Start of Lease $442.23; Total Monthly Payment $357.73. For the 36 months the total cost of the lease will be 357*36= 12, 852 The total monthly repayment is added to initial fees and the amount due at the start of the lease, initial cost, annual fees and the sales tax= 12852+784.25+69.50+25360=39065.75 Less the end value= 36065.75+15408.40 = 51, 474.15 The results of the financial evaluation of the lease indicate that the lease of the vehicle will be expensive in the long term. Lease reduces the taxable income of the company, which is more appropriate manner than depreciation which includes the use of the depreciation expense (Gitman, Juchau, & Flanagan, 2004, p. 66). However, the taxes saved today may be paid tomorrow making the approach different, but costly in some instances. The vehicle is useful in the long term service of the firm as such the lease may be expensive if used for five to 10 years. Therefore the option of lease for the 2013 ODYSSEY LX is not viable. Purchasing a 2013 ODYSSEY LX with a three-year payment Cost of purchase Initial Cost: $25,360.00; Term 36 months; Interest Rate 1.9%; Sales Tax: $1,648.40; Total Fee $15.00; Total Monthly Payment $773.41. The total cost of the purchase = 27842.72 + 1648.40+15+25360=54, 866.16 The cost of purchasing the van will be cheaper compared to leasing of the van from Honda. The purchase of the car in a three year plan will ensure faster payment for the car and accelerate the ownership transfer. However, monthly payments are high when you purchase than when you lease. The beauty of purchase is that you can sell the car in case of business challenges and allow for the development of the other aspect. There is no limitation on the mileage when using a purchased vehicle. Therefore, choosing whether to lease or buy is dependent of cost implications, advantages and disadvantages of the purchase or lease options. For the company, the longevity of operations must be evaluated in order to achieve success. The purchase would be the most viable option based on the cost implications of the cars. The total cost of leasing a 2013 ODYSSEY LX for three years is $51, 474.15 while for a three-year purchase option is $54, 866.16. The five-year purchase plan total cost is $56, 188.6. From the findings, it is clear that the costs vary marginally. Purchase of the van is the most viable option. The acquisition of new vehicles can be effective because it ensures that the company does not have a mileage restriction which can lead to other costs. According to Boone and Kurtz, leasing may appear cheap, but in the long run is very expensive for the company (Boone & Kurtz, 2011, p. 45). Leasing a car is always similar to visiting a more expensive restaurant. Leasing ensures the company pays for the vehicle’s loss of values also termed as depreciation. Therefore, since depreciation occurs in the early years of the vehicle, leasing ensures you continue to pay for depreciation for the rest of the lifespan at a high price (Gitman, Juchau, & Flanagan, 2004, p. 89). In addition, it ensures you do not pay the sale price of the car. The insurance rate for leasing is always at the peak because the car is at its most valuable point in life. If the car is bought and retained for five to ten years, it becomes less expensive to insure as it ages. In addition, the company increases its asset base by the acquisitions. Leasing creates a liability to the company which may be costly in the long run compared to the purchase of the vehicles. For the environmental, health & safety consulting firm, a three-year purchase term is the best because it reduces the liability while increasing the assets of the company. The purchase of the van and car can increase performance of the company by increasing the access to clients and operation areas. In spite of the benefits of purchase, it is evident that the company will be forced to pay higher monthly subscriptions and insurance premiums. Purchasing the car with a five-year payment plan Initial Cost: $25,360.00; Term 36 months; Interest Rate 2.9%; Sales Tax: $1,648.40; Total Fee $15.00; Total Monthly Payment $484.92. 484.92*60=29095.2 Therefore, 29095.2 + 15 + 1648.40 +25360 = 56, 188.6 From the calculations above, the monthly payment for the purchase of the van is slightly lower compared to the three-year plan monthly charges. However, it increases the total cost of the car significantly, making this option not viable. It also prolongs the payment duration from 36 months to 60 months increasing the uncertainty and other unforeseen risks Evaluation of the cost of leasing a 2013 CRV LX 4WD Leasing on a 36 month plan Initial Cost: $23,240.00; Lease End Value $13,867.95; Lease Term 36 months; Sales Tax $794.29; Acquisition Fee $595.00; Total Annual Fees $69.50; Total Initial Fees $15.00 Amount Due at Start of Lease $447.32; Total Monthly Payment $362.82. Therefore, it will be 362*36 = $13061.52 Total cost =13061.52 +447.32 + 23240 +794+208.5=37751.34 This option is viable based on the use of the vehicle. The vehicle is for official use which defines its mileage. The cost of purchasing the car is significantly higher than the lease, but the duration of usage is not defined as such the lease option best. Leasing can be effective when the area of operation is clearly known and mileage can be calculated. In case of mishap such as theft, the insurance will only reimburse for the car’s market value that does not cover the amount owed on the lease making the situation complex for the company. Lease also offers the opportunity for off-balance sheet financing, which means the company’s obligation to pay the lease, is not captured in the balance sheet. Leasing offers several advantages that have been highlighted in the discussion. Therefore the lease of the car is the best option. Three-year purchase plan for 2013 CRV LX 4WD From the calculations done to establish the difference between the options, there is minimal difference between leasing and purchasing. However, in order to choose from the options, the advantages of the various approaches must be evaluated in order to understand the nature of the business transaction. Other factors to be considered in deciding whether to lease or purchase a car include the duration of car use which may be short-term or long-term (Gitman, Juchau, & Flanagan, 2004, p. 74) Initial Cost: $23,240.00; Term 36 months; Interest Rate 3.9%; Sales Tax: $1,510.60; Total Fee $15.00; Total Monthly Payment $731.18. Total cost = 26322.48 + 1510.60 +15 +23240 = $51088.08 Five-year purchase plan for 2013 CRV LX 4WD A five- year purchase plan leads to increased duration of payment and costs. Therefore, it leads to serious challenge for the business if not addressed properly in the financial evaluation. In spite of the challenge, purchasing of the car increases freedom of use. Initial Cost: $23,240.00; Term 60 months; Interest Rate 3.9%; Sales Tax: $1,510.60; Total Fee $15.00; Total Monthly Payment $455.66. Total cost = 27339.6 + 1510.6 + 15 +23240 = 52, 105. Conclusion In conclusion, environmental, health & a safety consulting firm should focus on buying the van through a three- year purchase plan. The purchase of a van will increase the company’s asset while the lease of the car is a liability. The cost of the lease is relatively close to purchase value making purchases of the vehicles the best option. However, a five-year payment plan will be costly for the organization since it will increase the cost of the car and van while also increasing the insurance premiums. Therefore, the cost of a three-year payment plan would be the most viable option for the company for the van and a three- year lease plan for the car. Reference Boone, L. E., & Kurtz, D. L. (2011). Contemporary Business. London: John Wiley & Sons. Daugherty, P. J., Chen2, H., Mattioda, D. D., & Grawe, S. J. (2009). Marketing/logistics Relationships: Influence on capabilities and Performance. Journal of Business Logistics, 1-18. Gitman, L. J., Juchau, R., & Flanagan, J. (2004). Principles of Managerial Finance. Melbourne: Pearson Education Australia. Kumar, A., & Sharma, R. (2000). Principles Of Business Management. London: Atlantic Publishers & Dist. Parker, B. (2005). Introduction to Globalization and Business: Relationships and Responsibilities. London: SAGE. Read More