Chapter 8, Problem 1OTN

Discuss the role of leasing for private transportation and how it impacts the cost structure and operating costs of private trucking

Assume you work for a company that leases cars. An auto dealership contacts you and tells you that it has a customer that wants to lease a car and can arrange for your company to purchase the vehicle and then lease it to the customer.  Note that an important variable for you as a leasing firm is the “residual value” of the vehicle when the lease matures and you as the leasing firm must sell the vehicle.  It must be forecast and as a result is the source of much of the risk in the lease.  The customer that they have has sufficient credit and wants to lease a $42,000 vehicle for 4 years with monthly payments.  Your competitor is a leasing company that offers leases for the vehicle requiring the customer to have a down payment of $4,000 and monthly lease payments of $575 beginning when the lease is signed.  So at the signing, the customer must pay $4,575.  If your firm meets the competitors’ terms, what must the residual value be at the end of the lease in 4 years for your firm to earn 9%…

Which of the following typically represents an advantage of leasing over purchasing an asset with an installment note? a. Lease payments often are lower than installment payments.b. Leasing generally requires less cash upfront.c. Leasing typically offers greater flexibility and lower costs in disposing of an asset.d. All of the above are advantages of leasing.