Amanda Forsythe of Springfield, Missouri, must decide whether to buy or lease a car she has selected. She has negotiated a purchase price (gross capitalized cost) of $38,000 and could borrow the money to buy from her credit union by putting $2,700 down and paying $829.02 per month for 48 months at 6 percent APR. Alternatively, she could lease the car for 48 months at $545 per month by paying a $2,700 capitalized cost reduction and a $350 disposition fee on the car, which is projected to have a residual value of $11,900 at the end of the lease. Use the Run the Numbers worksheet to advise Amanda about whether she should finance or lease the car. Round your answers to the nearest cent.
Finance charges (borrowing the car): $
The dollar cost of leasing: $
Amanda should finance or lease the car?
Buy Versus Lease Amanda Forsythe of Springfield, Missouri, must decide whether to buy or lease a car she has selected. She has negotiated a purchase price (gross capitalized cost) of $38,000 and could borrow the money to buy from her credit union by putting $2,700 down and paying $829.02 per month for 48 months at 6 percent APR. Alternatively, she could lease the car for 48 months at $545 per month by paying a $2,700 capitalized cost reduction and a $350 disposition fee on the car, which is projected to have a residual value of $11,900 at the end of the lease. Use the Run the Numbers worksheet to advise Amanda about whether she should finance or lease the car. Round your answers to the nearest cent. Finance charges (borrowing the car): $ The dollar cost of leasing: $ Amanda shoul V -Select- the car. finance lease RUN THE NUMBERS Dealer Financing or Rebate? Advertisements for new vehicles often offer low APRs for dealer-arranged loans. A cash rebate of $1,000 to $3,000 (or more) off the price of the car may be offered as an alternative to the low interest rate. If you intend to pay cash, then the cash rebate obviously represents the better deal. But which alternative is better when you can arrange your own financing? To compare the two APRs accurately, you must add the opportunity cost of the forgone rebate to the finance charge of the dealer financing. The worksheet provides an example of this process Suppose a dealer offers 29 percent financing for three years with a $1,269 finance charge. Alternatively, you can receive a $3,000 rebate if you arrange your own finandng. The price of the car before the rebate is $32,000. Assume you can make a $4,000 down payment and that you can get a 7 percent loan on your own. This worksheet can be found on the Garman/ Forgue companion website, or you can find similar worksheet at www.bankrate.com calculators/auto/car-rebates-calculator.aspx. DO IT IN CLASS The lower of the values obtained in steps 3 and 4 is the better deal. In this instance, the financing that you arranged on your own is more attractive. In fact, any loan you arrange that carries an APR lower than 12 percent compares favorably with the dealer-arranged financing in this case. Your Figures Step Example 1. Determine the dollar amount of the rebate. $3,000 2. Add the rebate amount to the finance charge for the dealer financing (dollar +$1,269 cost of credit) 3. Use the formula from Chapter 7 (Equation [7.2] on page 221 and used here as Equation [8.1]) to calculate an adjusted APR for the dealer financing. Y(95P+9)F 12PP + 1)(4D+F) Where APR = Annual percentage rate Y = Number of payment periods in one year F= Finance charge in dollars D=Debt (amount borrowed) P= total number of scheduled payments (12)[(95 x 36) + 9$3,000+ $1,269) APR =- = 9.45% ** 12 x 36(36 + 1/[(4 x $28,000) + ($3,000+ $1,269)] 4. Write in the APR that you arranged on your own. 7% Buy Versus Lease Amanda Forsythe of Springfield, Missouri, must decide whether to buy or lease a car she has selected. She has negotiated a purchase price (gross capitalized cost) of $38,000 and could borrow the money to buy from her credit union by putting $2,700 down and paying $829.02 per month for 48 months at 6 percent APR. Alternatively, she could lease the car for 48 months at $545 per month by paying a $2,700 capitalized cost reduction and a $350 disposition fee on the car, which is projected to have a residual value of $11,900 at the end of the lease. Use the Run the Numbers worksheet to advise Amanda about whether she should finance or lease the car. Round your answers to the nearest cent. Finance charges (borrowing the car): $ The dollar cost of leasing: $ Amanda shoul V -Select- the car. finance lease RUN THE NUMBERS Dealer Financing or Rebate? Advertisements for new vehicles often offer low APRs for dealer-arranged loans. A cash rebate of $1,000 to $3,000 (or more) off the price of the car may be offered as an alternative to the low interest rate. If you intend to pay cash, then the cash rebate obviously represents the better deal. But which alternative is better when you can arrange your own financing? To compare the two APRs accurately, you must add the opportunity cost of the forgone rebate to the finance charge of the dealer financing. The worksheet provides an example of this process Suppose a dealer offers 29 percent financing for three years with a $1,269 finance charge. Alternatively, you can receive a $3,000 rebate if you arrange your own finandng. The price of the car before the rebate is $32,000. Assume you can make a $4,000 down payment and that you can get a 7 percent loan on your own. This worksheet can be found on the Garman/ Forgue companion website, or you can find similar worksheet at www.bankrate.com calculators/auto/car-rebates-calculator.aspx. DO IT IN CLASS The lower of the values obtained in steps 3 and 4 is the better deal. In this instance, the financing that you arranged on your own is more attractive. In fact, any loan you arrange that carries an APR lower than 12 percent compares favorably with the dealer-arranged financing in this case. Your Figures Step Example 1. Determine the dollar amount of the rebate. $3,000 2. Add the rebate amount to the finance charge for the dealer financing (dollar +$1,269 cost of credit) 3. Use the formula from Chapter 7 (Equation [7.2] on page 221 and used here as Equation [8.1]) to calculate an adjusted APR for the dealer financing. Y(95P+9)F 12PP + 1)(4D+F) Where APR = Annual percentage rate Y = Number of payment periods in one year F= Finance charge in dollars D=Debt (amount borrowed) P= total number of scheduled payments (12)[(95 x 36) + 9$3,000+ $1,269) APR =- = 9.45% ** 12 x 36(36 + 1/[(4 x $28,000) + ($3,000+ $1,269)] 4. Write in the APR that you arranged on your own. 7%
