Under this approach, the closed-end lease with a fair market buy back has only certain cash flows, while the other alternatives have both certain and uncertain cash flows.
The expected profit from exercising the option to purchase under the closed-end lease with a guaranteed buy back is equal to C.
Note, however, that the expected value of the uncertain cash outflow from the closed-end lease with a guaranteed buy back is [Mathematical Expression Omitted], which is less than either [P.
This paper shows that previous applications of these approaches have ignored the value of the consumer's right under some closed-end leases to purchase the leased auto at a predetermined price and as a consequence have overstated the net costs of these leases.
However, adjusting for uncertain cash inflows would make these alternatives less attractive vis-a-vis both closed-end leases, and the guaranteed buy back lease would become less attractive relative to the fair market value lease.
When the leased car is assumed to be purchased at the end of the lease, all of the cash flows from the purchase and open-end lease alternatives are certain, while the lease purchase option prices are uncertain for the closed-end leases.