Chapter 23 — Exercises: Leasing

Work these on paper or out loud the way you'll actually do it on the floor. Calculation items build the reflexes that let you put a lease together in front of a customer without freezing.

Difficulty legend: ⭐ basic · ⭐⭐ applied · ⭐⭐⭐ advanced/judgment · ⭐⭐⭐⭐ extension

For calculation items, a numeric answer is in a <details> block so you can check yourself. Most conceptual and skills items have no key here — selected answers live in Appendix I.

Part A — Conceptual Understanding ⭐

A1. In one sentence, what does a lease actually pay for? (The threshold idea.)

A2. Name the four numbers every lease is built from, and give a one-line plain-English definition of each.

A3. The residual value is calculated as a percentage of which number — the negotiated selling price, or the MSRP? Why does the answer matter to the customer?

A4. Convert each money factor to an approximate APR: (a) 0.00100, (b) 0.00125, (c) 0.00250, (d) 0.00375. State the rule you used.

A5. Write the two formulas that make up a lease payment (depreciation charge and rent charge), and then the formula for the total pre-tax monthly payment.

A6. In the rent-charge formula, you multiply the money factor by the sum of cap cost and residual, not just the cap cost. In one or two sentences, why?

A7. True or false, and explain: "A high residual is bad for the person leasing because it means you owe more at the end."

A8. What is the difference between the acquisition fee and the disposition fee — who charges each, and when?

A9. Define "cap cost reduction" and give two examples of things that can be one.

A10. What is the lease analog of "dealer reserve" from Chapter 22, and how is it disclosed/marked up?

Part B — Applied Analysis ⭐⭐

B1. A customer says: "Leasing is just renting — you pay forever and own nothing, so buying is always smarter." Using the threshold idea, identify the flaw in the logic and rewrite the sentence so it's accurate.

B2. Two SUVs cost the same $36,000 MSRP. SUV-A has a 36-month residual of 62%; SUV-B has 48%. Same money factor, same selling price. Without computing the full payment, which one leases with a lower payment, and explain the mechanism in terms of the depreciation slice.

B3. A lease ad shows "$229/mo!" in big type and "$3,995 due at signing" in small type, 36-month term. Roughly how much is the true monthly cost if you spread the due-at-signing across the term (ignore the portion that's first month's payment, just to see the effect)? Why does this matter when comparing leases?

B4. A customer drives 20,000 miles a year and is excited about a 36-month, 12,000-mile lease. Compute the excess miles over the lease and the charge at $0.25/mile. Then explain, in plain English, why this customer should probably buy instead.

B5. A customer's lease is ending. The contract residual is $20,500. You check the market and the car is realistically worth $23,800 today. What is the lease-end equity, and name two ways the customer could capture it.

B6. A dealer's buy money factor on a lease is 0.00110. The customer is quoted a sell money factor of 0.00160. The cap cost is $33,000 and the residual is $19,000, 36-month term. Compute the extra rent per month from the markup, and the total markup dollars over the lease.

B7. A customer wants a lower lease payment and proposes putting $5,000 down. Give the better levers for lowering a lease payment (name at least three), and explain the risk of the $5,000-down approach if the car is totaled in month two.

B8. A manufacturer is running a "subsidized" lease on a slow-selling sedan: an artificially high residual (62% when the car would realistically be worth ~50%) and a near-zero money factor (0.00010). Explain how each of those two subsidies lowers the payment, and then explain the catch a buyer should understand — what the inflated residual means if they want to buy the car at the end.

B9. Same car, two lease quotes. Quote 1: selling price $30,000, residual 57%, money factor 0.00120, 36 months, $0 down. Quote 2: selling price $30,000, residual 57%, money factor 0.00120, 36 months, but $3,000 due at signing as a cap cost reduction and an advertised payment that's lower. Without doing the full math, explain which is the better deal (not the lower payment) and why, and state the one thing you'd compute to compare them fairly. (MSRP $32,000 for residual.)

Part C — Skills & Practice ⭐⭐–⭐⭐⭐

C1. Calculate this lease (full, every line). - MSRP $38,000 · negotiated selling price $35,200 · acquisition fee $795 (capitalized) · cap cost reduction $0 · residual 55% of MSRP · money factor 0.00150 · term 36 months · tax 7% on the payment.

Build it step by step: gross cap cost → adjusted cap cost → residual in dollars → depreciation charge → rent charge → pre-tax payment → tax → monthly payment. Show every step.

C2. Calculate the same lease with money down. Take C1 and add a $2,500 cap cost reduction. Recompute the pre-tax monthly payment, and state how much the payment dropped and roughly how that compares to the $2,500 spread over 36 months.

C3. Write your word track: explain a lease to a skeptic. A folded-arms customer says leasing is a scam. Write your 4-beat plain-English explanation: (1) the threshold line, (2) the four numbers, (3) the two-part payment, (4) the honest "is it right for you" filter (keep-cycle + miles). Then read it aloud and time it — aim for under 3 minutes.

C4. Role-play: the lease-vs-buy conversation. Pair up (or play both roles). The customer is genuinely unsure whether to lease or buy the same SUV. Practitioner: ask the two filter questions (how long do you keep cars? how many miles?), then walk the lease-vs-buy framework honestly. The customer keeps cars 8 years and drives 18,000 mi/yr — let the honest answer (buy) emerge from their situation, not your preference.

C5. Diagnose the deal. A customer proudly shows you their new lease: $189/mo. You dig in: 36 months, $4,500 due at signing, money factor 0.00333, residual 44%, and a $1,800 extended service contract capitalized into the cap cost without the customer realizing it. Write a short diagnosis: translate the money factor to APR, flag the residual, normalize the payment for the due-at-signing, and name what went wrong and how an honest process would have differed.

C6. Build a lease-end equity check. Write the short script you'd use 75 days before a customer's lease ends. It must: (a) state the contract residual, (b) explain you'll check the car's current market value against it, (c) explain the three doors (return / buy at residual / re-lease), and (d) commit to telling them honestly if they have equity, even if returning would be easier for you.

C7. Calculate the full "due at signing." ⭐⭐⭐ A customer is leasing a vehicle with this structure: adjusted cap cost $33,000, residual $20,000, money factor 0.00130, 36 months, tax 6% on the payment. The lender requires at signing: the first month's payment, a $695 acquisition fee (paid up front this time, not capitalized — so use a cap cost that does not include it; assume the $33,000 already excludes it), a $500 refundable security deposit, and $300 in title/registration. Compute (a) the monthly payment and (b) the total due at signing. Then write one sentence on why "due at signing" is the number a buyer should scrutinize most.

C8. Translate a real lease ad. ⭐⭐ Find or write a realistic lease ad ("$279/mo for 36 months, $2,999 due at signing, 10,000 miles/yr"). Reverse-engineer everything you can and list the questions you'd have to ask to know whether it's a good deal: what's the MSRP and selling price? the residual %? the money factor (ask for it, then × 2400)? what's in the due-at-signing? Then write the one sentence you'd tell a customer who points at the ad and says "that's a great deal, right?"

Part D — Synthesis & Critical Thinking ⭐⭐⭐

D1. "Leasing is cheaper than buying" and "buying is cheaper than leasing" are both wrong as blanket statements. Explain why, using the idea that the most expensive years of any car are the first few, and the cheapest are after it's paid off.

D2. A money-factor markup is legal and a dealer is entitled to make money. Where, exactly, is the ethical line between a fair markup and an exploitative one? Use the same reasoning you'd apply to dealer reserve from Chapter 22, and tie it to the gut-check question ("would I be comfortable if this customer could hear my thoughts?").

D3. A customer with a tight budget wants the lowest possible payment and is leaning toward a lease with a big down payment to get there. Walk through the conflict between "give the customer what they asked for" and "give the customer what serves them," and decide what you'd actually do and say.

D4. Some manufacturers heavily subsidize leases (inflated residuals, near-zero money factors) on specific models to move them. Is a subsidized lease "too good to be true," or a genuine deal? How would you explain to a customer when a subsidized lease is a real bargain versus when the subsidy is masking a car that's hard to sell?

D5. Returning a leased car that's worth less than its residual lets the customer walk away while the lender eats the shortfall. Is that a "loophole," or is it exactly what the customer paid for with the rent charge? Defend your view, and connect it to who set the residual.

D6. A coworker argues: "The money factor is supposed to be confusing — that's the point. If customers understood it, they'd negotiate it, and we'd make less. So why would I ever explain the × 2400 trick to a customer?" Make the business case (not just the moral case) for teaching the customer the conversion anyway. Tie it to the difference between Priya's and Rick's referral bases (Theme #3, ethics is the profitable long game).

D7. A customer qualifies for the lowest (subsidized) money factor but is also a perfect candidate for an extended service contract you genuinely believe fits their situation. How do you present both the honest low money factor and the product, on a lease, without it looking like you took with one hand what you gave with the other? Where does the menu (Ch 24) fit, and what must not happen to the service contract (think §23.4's payment-packing warning)?

Part M — Mixed / Interleaved Practice ⭐⭐–⭐⭐⭐

M1. (Ch 23 + Ch 22.) A customer is choosing between a 60-month loan and a 36-month lease on the same $32,000 car. Build a side-by-side: estimate the loan payment (use the Ch 22 loan formula, your choice of a realistic APR) and the lease payment (your choice of realistic residual + money factor), then write two sentences on what the customer owns at the end of each, and who each fits.

M2. (Ch 23 + Ch 11.) A customer wants to lease a new car and trade in their current vehicle, which has $14,000 of payoff and an ACV of $11,500. Explain what happens to that $2,500 of negative equity if it's rolled into the lease, and why "rolling it into a lease" is usually a worse idea than in a loan. Use the Ch 11 equity definition.

M3. (Ch 23 + Ch 1.) List every place a single lease deal makes money for the dealership (front-end, reserve/money-factor markup, acquisition-fee markup, capitalized products). Then explain why the lease's multi-input complexity makes disclosure more important than on a cash deal — tying back to the Ch 1 idea that F&I is a profit center.

M4. (Ch 23 + Ch 16 + Ch 17.) Explain why your lease portfolio is the most predictable prospecting list in the dealership. Sketch a simple follow-up cadence for a leased customer from delivery through lease-end (90 days out), borrowing from your Ch 16 follow-up plan and Ch 17 prospecting plan.

M5. (Ch 23 + Ch 3.) Using the five customer types from Chapter 3, name two types for whom a lease is often a natural fit and one type for whom a lease is often a poor fit, and explain why in terms of what each type wants and fears.

M6. (Ch 23 + Ch 12.) A customer believes a lease payment is a fixed package and so doesn't bother negotiating. Explain, using the negotiation mindset from Chapter 12, which lease inputs are negotiable and how you'd transparently invite the customer to negotiate the cap cost the same way they'd negotiate a purchase price.

Part E — Research & Extension ⭐⭐⭐⭐

E1. Pull up current published lease offers for two competing vehicles in the same segment (use manufacturer sites). For each, find the four numbers (cap cost / selling price, residual, money factor or APR, term) and any due-at-signing. Normalize both leases to a true monthly cost and compare which is actually the better deal — and explain why in terms of residual and money factor.

E2. Research how your state taxes a car lease (payment vs. full price vs. cap-cost-reduction method). Write a one-paragraph summary a customer in your state could understand, and show how it changes the worked lease in §23.4.

E3. Investigate the early-2020s used-car price spike and lease-end equity. Find a credible account of how unusually many leased cars ended up worth more than their residuals, and write a short note on what that episode teaches about who bears residual risk on a lease — and why checking market value against residual at lease-end is always worth doing.