Building a

Decision Model
Financing or
Leasing Car
Team 2
Alejandro Balarezo, Aman Budhiraja,
Nitin Choudhary, Neetu Sharma
Land
Acknowledgement

“Royal Roads University is

located on the ancestral and
traditional Lands of the
Lekwungen-speaking
families of Xwsepsum
(Esquimalt) and Lekwungen
(Songhees).”
 Introduction – The Dilemma
Exploring the Mess
Problem Statement
Decision variables, Outcomes
Agenda
Problem Model, Analysis
Influence Chart
Recommendations
Learnings
The “Dilemma” - To lease or finance a car
“Julia is a 29-year-old chartered accountant, with an annual income of $72,000. She
is trying to decide whether to finance or lease a car. She resides in Victoria, British
Columbia, Canada, and is looking at cars in the $50,000 range. She has savings of
$20,000, which can be utilized for making a down payment.”

JULIA NEEDS A RELIABLE JULIA HAS SAVINGS OF $20K UNCERTAIN WHETHER SHE
VEHICLE FOR PERSONAL USE WHICH SHE CAN UTILIZE SHOULD OPT FOR CAR
THAT SUITS HER FINANCIAL AGAINST DOWN PAYMENT FINANCING OR LEASING GIVEN
SITUATION HER FINANCIAL
CIRCUMSTANCES

4
5
Facts and
She is looking to either Financing would mean an Leasing would mean an
finance or lease a car increase of $1414/month increase of $682/month in
within a price range of $ in her expenses her expenses
50,000

Details

Savings of $20K is available Approx. 12000 miles are The term is 3 years
for down payment intended to be driven per
annum

6
Assumptions

Operational Financial
Mandatory Insurance: 2%
Ownership: 3-5 years included
Car Type: Gasoline
Depreciation: Covered in
Lease Benefit: Full maintenance lease
coverage
Dealer: Pre-selected Purchase Price: Up to US$
100,000
Mileage Limit: Lease condition
Accident Assurance: No incidents Legal Fees: Covered by dealer
anticipated Interest Rate: Tied to net
Max Mileage: 21,000 miles income
Personal Use: Intended purpose Resale Plan: End-of-term sale
Minimum Net Income: $5000
Fuel Price Increase: 5% yearly

Source: https://www.ratehub.ca/blog/what-is-the-total-cost-of-owning-a-car/
https://driving.ca/column/lorraine/average-cost-own-car-canada 7
Potential Outcomes

Financing
Leasing

Financing may be Leasing is the

recommended for preferred option for
those planning to individuals seeking
keep the car long- short-term vehicle
term, aiming for ownership with lower
equity accumulation, initial costs and
and ownership flexibility in mileage
benefits. restrictions.

8
What questions can be asked?

How long does How many miles

she plan to does she expect to
use the car? run the car per
annum?

What price How much down

range is she What is her annual
payment does she
looking for? income?
want to make?

9
Problem Statement
Decide whether to finance or lease a car

Ensure it falls within the financial situation

Ensure it meets the car specification requirements

10
Decision
Variables &
Outcomes

11
 Key Issue/ Variables
Decision
Criteria

Variables of Lease: Monthly lease

1 Lower Total Cost of Ownership payment, Interest Rate, Mileage per Year,
Depreciation, Tax expense, Financial
Expenses, Province, Term, Residual Value
Efficient car purchase price
2 based on annual mileage and
income
Variable of Finance: Maintenance Expense,
Monthly Contract Payment, Interest Rate,
TCO vs Total Income during Mileage per Year, Depreciation, Financial
3
ownership (not to exceed 15%) Expenses, Downpayment, Province, Term,
Resale Value
 To Finance or Lease?

PROS PROS

• Ownership • Lower monthly payments

• No mileage restriction • Lower down payment
• Resale Value • Flexibility to move to new car quickly

CONS CONS

• Higher monthly payments • No ownership

• Maintenance Cost • Mileage Restriction
• Risk of negative equity • Lease deals are limited
The Decision Model

Decompose the Continuous

Simplify the Model Prototyping Analysis
problem Review

Reference: Baker, Powell Kenneth R. (2016). Business Analytics: The Art of Modeling with Spreadsheets (fifth ed.). Wiley Global Education.

14
Analysis
Outflows Finance Lease
Finance Lease
Monthly Payment $50,890.02 $24,562.50
Purchase Price $50,000.00 Parking Expenses $5,400.00 $5,400.00
Term 3 Fuel Expenses $11,487.25 $11,487.25
Maintenance Expenses $1,500.00 $0.00
Mileage Per Year 12,000
Administrative Expenses $390.00 $390.00
Down Payment $ $5,000.00 Tax Expenses $6,000.00 $1,800.00
Total Outflows $75,667.27 $43,639.75
Down Payment (%) 10% Inflows Finance Lease

Amount Borrowed $45,000.00 Resale Value $20,418.75

Total Inflows $20,418.75 $0.00
Net Income $12,000.00
Total Cost of Ownership (TCO) $55,248.52 $43,639.75
City BC Total Net Income During Ownership $440,697.60 $440,697.60

Parking Fee (monthly) $150.00

Monthly Contract TCO vs Total Income During Ownership 12.54% 9.90%
Payment $1,413.61 $682.29 Convenient Convenient

15
Analysis
Leasing Vs Financing
(0.10)
TCO VS TOTAL INCOME DURING OWNERSHIP 0.13
(440697.60)
TOTAL NET INCOME DURING OWNERSHIP 440697.60
(43639.75)
TOTAL COST OF OWNERSHIP (TCO) 55248.52

0.00
TOTAL INFLOWS 20418.75
0.00
RESALE VALUE 20418.75

(43639.75)
TOTAL OUTFLOWS 75667.27

(1800.00)
TAX EXPENSES 6000.00

(390.00)
ADMINISTRATIVE EXPENSES 390.00
0.00
MAINTENANCE EXPENSES 1500.00

(11487.25)
FUEL EXPENSES 11487.25
(5400.00)
PARKING EXPENSES 5400.00
(24562.50)
MONTHLY PAYMENT 50890.02

-500000.00 -400000.00 -300000.00 -200000.00 -100000.00 0.00 100000.00 200000.00 300000.00 400000.00 500000.00

Lease Finance 16
Analysis
Finance information Lease information
Loan Amount $45,000.00 Net Capital Cost $45,000.00

Annual Interest Rate 4.50% Annual Interest Rate 4.50%

Annual Insurance Rate 2.00% Annual Insurance Rate 2.00%

Term Length (Years) 3
Term Length (Years) 3
Number of Payments Per Year 12
Number of Payments Per Year 12
Total Number of Payments 36
Total Number of Payments 36
Monthly Payment $607.29
Monthly Payment $1,338.61
Total Payment $21,862.50
Total Payment $48,190.02 Total Interest $5,062.50
Total Interest $3,190.02 Yearly Insurance $900.00
Yearly Insurance $900.00 PII (Pmt, Interest, Insurance) $682.29
PII (Pmt, Interest, Insurance) $1,413.61 Residual Value $30,000.00

17
Scenario
Analysis - 1 Individual Driver

Monthly Income 5,000

Term

3
Finance

High
Lease

High

Purchase Price 27,000 4 High High

An individual with a monthly
income of $5,000 is considering Down Payment 20% 5 High Convenient
purchasing a car priced at
$27,000. They are open to terms Mileage 9,000
ranging from 3 to 5 years but prefer
a 5-year term. They can afford a What if we reduce the mileage to 6,000?
20% down payment. Their annual
mileage requirement is 9,000
miles, but 6,000 miles would also 5 Convenient Convenient
be convenient. They are exploring
options between financing and
leasing.
Scenario Family Car
Monthly
Term Finance Lease

Analysis - 2 Income
Purchase
Price
10,000

70,000
3

4
High

High
Convenient

Convenient
Down
A family with a monthly Payment 20% 5 High Convenient
income of $10,000 can Mileage 15,000
afford a car priced at What if we reduce the mileage to 12,000?
$75,000. They intend to
keep the car for 5 years 5 Convenient Convenient
and drive up to 15,000
miles per annum. They are What if we maintain the mileage and reduce de purchase price to
considering options 65,000?
between financing and
leasing. 5 Convenient Convenient
Influence
Chart -
Financing

20
Influence
Chart –
Leasing

21
Recommendation
For short-term car ownership
needs, leasing provides a cost-
effective solution with
manageable monthly payments
and flexibility. However, for those
planning to keep the car long-
term and potentially own it in the
future, financing offers greater
value and ownership benefits.

22
 Thorough research and analysis are essential
in financial decision-making.

Align choices with long-term goals for optimal

outcomes.
Personal
Learnings
Consider short-term benefits versus long-
term advantages.

Adaptation and ongoing learning are crucial

for navigating complex financial landscapes
effectively.
Questions?
 Sources

https://carspecs.org/gas-mileage/
https://carspecs.org/depreciation/
https://caredge.com/depreciation
https://www.omnicalculator.com/finance/car-depreciation

https://services.edmunds-media.com/image-service/unversioned-ed/ximm/?quality=85&image=/img/depreciation-infographic/how-fast-does-my-new-car-lose-value-2.jpg
https://goodcalculators.com/car-depreciation-calculator/
https://bizfluent.com/how-5914430-compute-depreciation-based-mileage.html
https://www.conceptcarcredit.co.uk/blog/car-depreciation-mileage-vs-age-vs-condition/#L5
https://www.youtube.com/watch?v=0ZtgJDisRf4
https://www.leaseguide.com/lease08/
https://www.findthebestcarprice.com/money-factor/
https://capitalmotorcars.com/sales-taxes-demystified-your-car-lease-payments-
explained/#:~:text=When%20you%20purchase%20a%20vehicle%2C%20you%20will%20have,much%20less%20than%20on%20a%20car%20your%20purchase.

https://www.savvynewcanadians.com/car-sales-tax-
canada/#:~:text=The%20provincial%20sales%20tax%20%28PST%29%20on%20used%20and,%E2%80%93%20%24149%2C999.99%3A%2015%25%206%20%24150%2C000%20and%20over%3A%2020%25
https://www.investopedia.com/terms/m/manufacturers-suggested-retail-price-msrp.asp
https://www.carhelpcanada.com/dealer-fees-and-extras-which-ones-to-avoid/
https://www.finder.com/ca/car-loans/buying-a-car/after-purchase-car-costs
https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100U8YT.pdf

https://www.canadadrives.ca/blog/maintenance/setting-your-annual-car-maintenance-budget#How%20Much%20Does%20It%20Cost%20to%20Maintain%20A%20Car?
https://searlesauto.ca/2017/02/costs-of-owning-a-car/#:~:text=If%20you%20had%20your%20oil,a%20year%20on%20vehicle%20maintenance
https://www.bcaa.com/blog/2018/auto/the-true-cost-of-owning-a-vehicle

https://www.ahainsurance.ca/car-insurance/average-mileage-per-year-canada/#:~:text=According%20to%20Natural%20Resources%20Canada,Canada%20is%20about%2015%2C200%20kilometres.