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# Applied 40S May 13, 2009

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Introduction to buying vrs. renting a home. The GDSR formula.

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### Applied 40S May 13, 2009

1. 1. Buying a New Home ... or is renting a better idea? Dad's new house by ﬂickr user Patrick Haney
2. 2. Tara wants to drive a small economy car priced at \$19 800 before taxes. PST is 7% and GST is 5%. She has \$3500 to use as a down payment for buying or leasing. If she buys the car, she will get a 4 year loan at 8.5% to pay for it. If she leases the car, she wants to buy the car at the end of the lease. The lease will be for 3 years at 8.5% and the residual value will be 43% of the original price. Tara will also need a 2 year loan (at 8.5%) at the end of the lease to buy the car. HOMEWORK (a) What is the total cost of buying the car? N=48 Cost w. Tax is \$22 176 I%=8.5 After Down Payment: \$18 676 PV=18676 PMT=-460.33 Monthly Payment: \$460.33 FV=0 P/Y=12 C/Y=12 PMT: END BEGIN Total Cost of Car: 48 * \$460.33 + \$3 500.00 = \$25 595.84
3. 3. Tara wants to drive a small economy car priced at \$19 800 before taxes. PST is 7% and GST is 5%. She has \$3500 to use as a down payment for buying or leasing. If she buys the car, she will get a 4 year loan at 8.5% to pay for it. If she leases the car, she wants to buy the car at the end of the lease. The lease will be for 3 years at 8.5% and the residual value will be 43% of the original price. Tara will also need a 2 year loan (at 8.5%) at the end of the lease to buy the car. (b) What is the total cost of owning the car if Tara leases it ﬁrst? Residual Value HOMEWORK N=24 \$19 800.00 * 0.43 = I%=8.5 N=36 \$8 514.00 PV=8514 I%=8.5 Depreciation PMT=-387.01 \$19 800.00 - \$8 514.00 = PV=17654.32 FV=0 PMT=-348.84 \$11 286.00 P/Y=12 FV=-8514 C/Y=12 Taxes P/Y=12 PMT: END BEGIN \$11 286.00 * 0.12 = C/Y=12 \$1 354.32 Lease: \$16 058.24 PMT: END BEGIN PV of Lease Loan Buy-Out: \$9 288.24 \$19 800.00 + \$1 354.32 - \$3 500.00 = Total Cost: \$25 346.48 \$17 654.32
4. 4. Tara wants to drive a small economy car priced at \$19 800 before taxes. PST is 7% and GST is 5%. She has \$3500 to use as a down payment for buying or leasing. If she buys the car, she will get a 4 year loan at 8.5% to pay for it. If she leases the car, she wants to buy the car at the end of the lease. The lease will be for 3 years at 8.5% and the residual value will be 43% of the original price. Tara will also need a 2 year loan (at 8.5%) at the end of the lease to buy the car. HOMEWORK (c) Name two beneﬁts of leasing the car instead of buying.