10/10/23, 6:47 PM Chapter 5 - assignment
Chapter 5
1. Vocabulary
The price of an asset being leased as specified in the lease agreement, which includes
the negotiated cost of the vehicle and any applicable fees and taxes, is called
the capitalized cost.
A closed-end, or walk-away, lease allows the lessee to merely return the vehicle at
the end of the lease period, provided that the preset mileage limit has not been
exceeded and the vehicle hasn’t been abused. A closed-end lease differs from an
open-end, or financial, lease. In an open-end lease, the lessee may be responsible for
an additional payment if the value of the car at the end of the lease period is less than
the lease’s residual value. If, at the end of the lease’s term, the market value of the car
is less than the residual value specified in the lease, then the lessee will be required to
pay this difference.
Depreciation represents the loss in the value of an asset that occurs during the period
of its ownership. It is calculated as the difference between the asset’s purchase price
and its subsequent sale price.
A lease is a contract and business transaction in which the user of an item, such as a
car or house, receives the right to use it in exchange for scheduled payments for a
fixed period of time. Unlike a cash- or loan-based purchase, a lease provides for the
use of the asset, but it does not result in ownership of the car or house. The provision
under which a lessee can purchase his or her leased car (or other asset) at the end of
the end of the lease period is called a purchase option. This provision will express
the automobile’s purchase price either as a fixed-market price or as the vehicle’s
residual value.
A rebate is an inducement to purchase that takes the form of a partial refund of a
car’s purchase price.
A vehicle’s residual value is its estimated value at the end of the lease period.
The sales contract is the agreement used to purchase a car that details the offering
price and all conditions of the offer; when the buyer and seller sign it, it establishes
the terms of the legally binding transaction.
The sticker price on a vehicle is the popular name given to the manufacturer’s
suggested retail price (MSRP), which is posted on a sticker on the vehicle’s window.
From a negotiating perspective, this number is effectively worthless, since it has
virtually nothing to do with the dealer’s invoiced cost for the vehicle.
2. Steps in the car-buying process
For many of us, purchasing a car is the first major purchase that we will make, as well
as the second-largest purchase, and the most frequent major expenditure that we will
make during our lifetimes. In contrast, purchasing a house is usually our largest, or
most valuable, major purchase, but most of us will buy many more cars than houses
during our lifetimes.
Due to their high costs and the fact that the majority, if not all, of these purchases are
made on credit, mistakes made during these transactions can be extremely expensive
and their effects felt for many years. Using a systematic process to evaluate these
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
about:blank 1/19
,10/10/23, 6:47 PM Chapter 5 - assignment
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
2 Test drive the car and meet the salesman at least once to ascertain if he or she is
someone you want to do business with.
3. How much car can I afford?
Before buying a car, it is critical that you determine both the complete price of the vehicle
and what you can afford to spend. This information is essential in deciding whether to
pay cash or finance the vehicle with a loan. The difference between these two methods of
payment, however, is the difference between paying the car’s full price versus making a
much smaller down payment and fitting the monthly payments into your budget.
There are two schools of thought about how much car you can afford. Financial experts
recommend that the amount of your car payment should not exceed 20% of your net
monthly income. Others suggest that if you can accommodate the payment in your
budget, then it’s acceptable—although you shouldn’t obligate yourself to eating rice
cakes for the next four years.
Amy is 55 years old, and her current gross monthly income is $2,800. Given an average
personal tax rate of 28% for her federal, state, and local taxes, Amy’s net monthly income
is $2,016. If she follows the advice of financial experts, what is the maximum amount
that she should spend to purchase a new vehicle? $40
Gross monthly Income = $2,800
Gross yearly Income = 2800*12 = $33,600
Personal Tax = 28%
Yearly tax paid = 0.28*33,600 = $9,408
Net annual income = Gross Yearly Income - Yearly Tax
Net Annual Income = 33,600 – 9,408 =$24,192
Net monthly Income = Net Annual Income/12 = 24,192/12
Net monthly income = $2,016
Not exceeding 20%
Net monthly Income = $2,016
Monthly tax paid = 0.20*2,016 = $403.2
Max car payment = $403
An alternative to the 20% rule is to evaluate your budget, determine a monthly payment
that you can reasonably afford, and then incorporate that information with the maturity
and interest rate of a possible loan to determine the value of the potential loan. When this
value is added to a saved amount of a down payment, you know the total amount that you
can reasonably afford to spend on a new car.
To review this process, consider the following case:
Amy’s Car-Buying Decisions
about:blank 2/19
, 10/10/23, 6:47 PM Chapter 5 - assignment
An alternative to the 20% rule is to evaluate your budget, determine a monthly payment
that you can reasonably afford, and then incorporate that information with the maturity
and interest rate of a possible loan to determine the value of the potential loan. When this
value is added to a saved amount of a down payment, you know the total amount that you
can reasonably afford to spend on a new car.
To review this process, consider the following case:
Amy’s Car-Buying Decisions
Amy, who lives in San Francisco, is trying to decide between the following car models:
Brand and Model Cost
Ford Fiesta $13,580
Toyota Prius 19,895
Kia Sorento 23,150
Porsche Boxster 48,100
She’s currently accumulated a down payment of $2,000 and she has determined that she
can afford maximum payments of $475 per month. Her initial research on the current cost
of auto loans has found that her lowest cost loan would be made by a savings and loan
association and would require an interest rate of 6% for four years.
Given this information, the maximum amount that Amy can afford to pay for her new car
is $22,226, and the most expensive car that she can afford to purchase, without stretching
her budget, is: The Toyota Prius
However, she could upgrade to a more expensive model by undertaking several activities.
Which of the following activities would allow this upgrade? Check all that apply.
Take a better-paying job or another, or part-time, job that would give her the
additional income to support a larger monthly payment
4. The lease versus purchase analysis - Part 1
Which is better: to lease or to buy?
A car buyer has two financing alternatives: to lease or to purchase. Each has operational
as well as financial advantages and disadvantages. Therefore, it is critical that you be able
to compare them for yourself and make your own decision. Remember, a dealer will
recommend the strategy that is most advantageous to him or her. You must protect your
own interests.
Statement:
Generally, requires lower monthly payments and allows you to get more car for your
money. Lease Transaction
No mileage allowance or disposition fee associated with the transaction. Purchase
Transaction
5. The lease versus purchase analysis - Part 2
Which is better: to lease or to buy?
A car buyer has two financing alternatives: to lease or to purchase. It is important to
evaluate all the options and analyze the consequences of lease versus purchase decision.
The understanding of a comparative worksheet that analyzes the automobile lease versus
purchase decision will help in making an informed choice.
about:blank 3/19
Chapter 5
1. Vocabulary
The price of an asset being leased as specified in the lease agreement, which includes
the negotiated cost of the vehicle and any applicable fees and taxes, is called
the capitalized cost.
A closed-end, or walk-away, lease allows the lessee to merely return the vehicle at
the end of the lease period, provided that the preset mileage limit has not been
exceeded and the vehicle hasn’t been abused. A closed-end lease differs from an
open-end, or financial, lease. In an open-end lease, the lessee may be responsible for
an additional payment if the value of the car at the end of the lease period is less than
the lease’s residual value. If, at the end of the lease’s term, the market value of the car
is less than the residual value specified in the lease, then the lessee will be required to
pay this difference.
Depreciation represents the loss in the value of an asset that occurs during the period
of its ownership. It is calculated as the difference between the asset’s purchase price
and its subsequent sale price.
A lease is a contract and business transaction in which the user of an item, such as a
car or house, receives the right to use it in exchange for scheduled payments for a
fixed period of time. Unlike a cash- or loan-based purchase, a lease provides for the
use of the asset, but it does not result in ownership of the car or house. The provision
under which a lessee can purchase his or her leased car (or other asset) at the end of
the end of the lease period is called a purchase option. This provision will express
the automobile’s purchase price either as a fixed-market price or as the vehicle’s
residual value.
A rebate is an inducement to purchase that takes the form of a partial refund of a
car’s purchase price.
A vehicle’s residual value is its estimated value at the end of the lease period.
The sales contract is the agreement used to purchase a car that details the offering
price and all conditions of the offer; when the buyer and seller sign it, it establishes
the terms of the legally binding transaction.
The sticker price on a vehicle is the popular name given to the manufacturer’s
suggested retail price (MSRP), which is posted on a sticker on the vehicle’s window.
From a negotiating perspective, this number is effectively worthless, since it has
virtually nothing to do with the dealer’s invoiced cost for the vehicle.
2. Steps in the car-buying process
For many of us, purchasing a car is the first major purchase that we will make, as well
as the second-largest purchase, and the most frequent major expenditure that we will
make during our lifetimes. In contrast, purchasing a house is usually our largest, or
most valuable, major purchase, but most of us will buy many more cars than houses
during our lifetimes.
Due to their high costs and the fact that the majority, if not all, of these purchases are
made on credit, mistakes made during these transactions can be extremely expensive
and their effects felt for many years. Using a systematic process to evaluate these
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
about:blank 1/19
,10/10/23, 6:47 PM Chapter 5 - assignment
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
2 Test drive the car and meet the salesman at least once to ascertain if he or she is
someone you want to do business with.
3. How much car can I afford?
Before buying a car, it is critical that you determine both the complete price of the vehicle
and what you can afford to spend. This information is essential in deciding whether to
pay cash or finance the vehicle with a loan. The difference between these two methods of
payment, however, is the difference between paying the car’s full price versus making a
much smaller down payment and fitting the monthly payments into your budget.
There are two schools of thought about how much car you can afford. Financial experts
recommend that the amount of your car payment should not exceed 20% of your net
monthly income. Others suggest that if you can accommodate the payment in your
budget, then it’s acceptable—although you shouldn’t obligate yourself to eating rice
cakes for the next four years.
Amy is 55 years old, and her current gross monthly income is $2,800. Given an average
personal tax rate of 28% for her federal, state, and local taxes, Amy’s net monthly income
is $2,016. If she follows the advice of financial experts, what is the maximum amount
that she should spend to purchase a new vehicle? $40
Gross monthly Income = $2,800
Gross yearly Income = 2800*12 = $33,600
Personal Tax = 28%
Yearly tax paid = 0.28*33,600 = $9,408
Net annual income = Gross Yearly Income - Yearly Tax
Net Annual Income = 33,600 – 9,408 =$24,192
Net monthly Income = Net Annual Income/12 = 24,192/12
Net monthly income = $2,016
Not exceeding 20%
Net monthly Income = $2,016
Monthly tax paid = 0.20*2,016 = $403.2
Max car payment = $403
An alternative to the 20% rule is to evaluate your budget, determine a monthly payment
that you can reasonably afford, and then incorporate that information with the maturity
and interest rate of a possible loan to determine the value of the potential loan. When this
value is added to a saved amount of a down payment, you know the total amount that you
can reasonably afford to spend on a new car.
To review this process, consider the following case:
Amy’s Car-Buying Decisions
about:blank 2/19
, 10/10/23, 6:47 PM Chapter 5 - assignment
An alternative to the 20% rule is to evaluate your budget, determine a monthly payment
that you can reasonably afford, and then incorporate that information with the maturity
and interest rate of a possible loan to determine the value of the potential loan. When this
value is added to a saved amount of a down payment, you know the total amount that you
can reasonably afford to spend on a new car.
To review this process, consider the following case:
Amy’s Car-Buying Decisions
Amy, who lives in San Francisco, is trying to decide between the following car models:
Brand and Model Cost
Ford Fiesta $13,580
Toyota Prius 19,895
Kia Sorento 23,150
Porsche Boxster 48,100
She’s currently accumulated a down payment of $2,000 and she has determined that she
can afford maximum payments of $475 per month. Her initial research on the current cost
of auto loans has found that her lowest cost loan would be made by a savings and loan
association and would require an interest rate of 6% for four years.
Given this information, the maximum amount that Amy can afford to pay for her new car
is $22,226, and the most expensive car that she can afford to purchase, without stretching
her budget, is: The Toyota Prius
However, she could upgrade to a more expensive model by undertaking several activities.
Which of the following activities would allow this upgrade? Check all that apply.
Take a better-paying job or another, or part-time, job that would give her the
additional income to support a larger monthly payment
4. The lease versus purchase analysis - Part 1
Which is better: to lease or to buy?
A car buyer has two financing alternatives: to lease or to purchase. Each has operational
as well as financial advantages and disadvantages. Therefore, it is critical that you be able
to compare them for yourself and make your own decision. Remember, a dealer will
recommend the strategy that is most advantageous to him or her. You must protect your
own interests.
Statement:
Generally, requires lower monthly payments and allows you to get more car for your
money. Lease Transaction
No mileage allowance or disposition fee associated with the transaction. Purchase
Transaction
5. The lease versus purchase analysis - Part 2
Which is better: to lease or to buy?
A car buyer has two financing alternatives: to lease or to purchase. It is important to
evaluate all the options and analyze the consequences of lease versus purchase decision.
The understanding of a comparative worksheet that analyzes the automobile lease versus
purchase decision will help in making an informed choice.
about:blank 3/19
