Principals of Financial Planning - FPLN300

Please help with question and show work for problem. Thanks for your help!

Samuel and Grace Paganelli want to replace their 1996pickup, which Samuel drives for work. They already own twovehicles, but need to replaceSamuel's truck because it has nearly225,000 miles on the odometer. The replacement must be a vehicle that fits his job as aself-employed electrician.

Samuel knows that he drives a lot on the job and is worried about thehigh-mileage penalty on manyleases, as well as the fees for excessive wear and tear.However, Grace is more concerned about the depreciation loss on a new truck purchase than the mileage penalty and would rather lease the new vehicle. She also likes the idea of having anew, safer truck every few years without the hassle of resale. Samuel also does not like the factthat, if theylease, they would not own the vehicle he will use for work. Warranty protection to insure the truck remains in service is very important.

They feel that they can afford to spend $560

560 per month over 4

4 years for a newvehicle, as long as their other associated expenses such asinsurance, gas, and maintenance are not too high. The Paganellis also do not know where to start looking for a vehicle without the hassle of negotiating with dealerships.

c. What is the highest price they can pay on the new vehicle if they can afford a down payment of $3 comma 700

3,700? Assume they finance their purchase for 48

48 months at 7.8

7.8 percent. (Hint: This is a present value of an annuityproblem.)

d. According to the National Automotive Dealer Association(NADA) guide found atwww.nadaguides.com, are the Paganellis better off selling their pickup or use it as atrade-in? Consider both price and time in your answer.

f. Explain to Grace and Samuel the guidelines of leasing and whether or not it is a smart financial move for them to consider. Would they be better off with aclosed-end oropen-end lease? From a purely financialperspective, would you recommend leasing orfinancing?c.

If Samuel and Grace can afford a down payment of $3 comma 700

3,700, a monthly payment of $560

560 and can finance their purchase for 48

48 months at 7.8

7.8 percent, then the highest priced vehicle they can afford is $

nothing

. (Round to the nearestcent.)

d. The Paganellis are betteroff:(Select the best answerbelow.)

A.

selling their vehicle because they will get less money than they would by trading it.However, trading in the vehicle offers the convenience of not having tolist, show, or sell the vehicle on their own.

B.

trading their vehicle because they will get more money than they would by selling it.However, trading the vehicle offers the convenience of not having tolist, show, or trade the vehicle on their own.

C.

trading their vehicle because they will get less money than they would by selling it.However, selling the vehicle offers the convenience of not having tolist, show, or trade the vehicle on their own.

D.

selling their vehicle because they will get more money than they would by trading it.However, trading in the vehicle offers the convenience of not having tolist, show, or sell the vehicle on their own.

f. Financing is most likely the better alternative to leasingbecause:(Select all thatapply.)

A.

there are no modificationrestrictions: Again as an electrician Samuel is likely to want to modify the truck to suit his business needs.

B.

there are no mileagerestrictions: Driving for work normally puts excess miles on thevehicle, especially for an independent businessman like Samuel. For acost-effective lease, the consumer should drive less than15,000 miles annually.

C.

there are no insurancerequirements: Since you do not own a leasedvehicle, Samuel would need to insure any vehicle he leased.

D.

there are no maintainancecosts: With alease, Samuel would need to make sure the vehicle was serviced often.

E.

there are norestrictions, or end of leasefees, for"wear andtear": Working as anelectrician, Samuel would probably put everything in thevehicle, causing at least some dents and dings.