Unit 9 Finance_10.4_Final Version.notebook June 10, 2014

Transcription

1 Amanda is a civil engineer and needs a vehicle for work, on average, for 12 days each month. She has been renting a vehicle when she needs it. She is wondering if renting is the most economical choice and is considering these options: 1

2 LEASING: If she chooses to lease a vehicle for 4 years: down payment monthly lease payments insurance maintenance Total Cost Monthly Cost BUYING: If she chooses to buy a vehicle and finance it for 4 years: vehicle cost monthly payments Total cost of loan (interest included) insurance maintenance Total Cost Monthly Cost RENTING: If she chooses to keep renting for 12 days a month for 4 years (same time frame as the leasing/buying options presented): Monthly Cost Total Cost 2

3 What to do? Obviously, answers will vary. For many, it's just not as simple as comparing the so called "monthly" rates. Most would probably say that the "renting" scenario here doesn't make sense. i.e. this is not something that would be traditionally done in the context of the given situation. The leasing and purchasing scenarios are really up to an individuals preference. Many people lease for reasons including low maintenance costs, having a new vehicle every so many years, not having to worry about selling/trading, having the option of buying if satisfied with the vehicle, possible lower monthly payments, etc. Many people purchase for reasons including the equity in the vehicle for future trades/selling, choosing a vehicle that traditionally has few maintenance costs and a "long life", just the fact of owning their own vehicle vs leasing, etc. Many people also buy used vehicles for reasons including lower pricing vs new vehicles (i.e. budget reasons), being able to provide for their own maintenance on an older but "in good shape" vehicle, having a second vehicle for others in the household, etc. OVERALL: Each situation is unique and it is thus impossible to generalize whether renting, leasing or buying is best. 3

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5 Leasing: If Lance chooses to lease an office space for 15 years: Cost= monthly lease payments (not including utilities, insurance, etc., in this problem i.e. we'll assume that these are equivalent to similar expenses if he were to buy the office space. Note: also not including damage deposit for leasing option since it is refundable ) Buying: If Lance chooses to buy office space and finance over 15 years: down payment monthly payments total Amount cost of loan (interest included) total buying cost Value of house with 'appreciation rate' in mind: Determine the estimated value of the house after 15 yrs assuming 2% appreciation rate: "Actual cost" of house keeping "equity" in mind after 15 yrs: Actual Cost=Buying Cost Equity= 5

6 WHAT TO DO? Most people would probably recommend that he buy the house. i.e. most would see leasing here as a waste of money (costing over 15 yrs $ vs $ for buying). But remember, each situation is unique. For example, he may first decide to lease for 3 years to further determine the strength of his business and then make a decision about buying after these 3 years. i.e. He may not be 100% sure and decides to proceed more cautiously. 6

7 PROBLEM FROM THE CURRICULUM GUIDE: Sarah is going to university in the fall and her parents are trying to decide whether to buy a house or rent an apartment for the 5 years she will be there. The house they are considering buying costs $200,000 and requires a down payment of $10,000. The bank will provide a 20 year mortgage, for the remainder of the cost, at 3% compounded semi annually with payments every month. The house they are considering renting is $1400 per month and requires an initial damage deposit of $700. a) What is the monthly payment for the mortgage? b) What is the total amount spent in the first five years if you purchase the house? c) What is the monthly payment for renting? d) What is the total cost for renting for 5 years? e) In the first five years, how much has been paid on the principal of the mortgage? f) If we only consider monthly costs, which option would be best? g) What other factors (ex: equity, maintenance, initial fees, penalties) should a person consider when making this decision? 7

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9 g) What other factors (ex: equity, maintenance, initial fees,penalties) should a person consider when making this decision? Answers will certainly vary... Recall: Each situation is unique and it is thus impossible to generalize whether renting or buying is best. Example: The parents see this as a good investment. The house may have another 2 bedrooms that can be rented out to two of Sarah's good friends. (also sharing the utility costs, food costs, etc.) Then, at the end of 5 years, the parents could sell the house. If they keep up the "maintenance" of the house, etc., they could possibly sell the house for more than they purchased it for. 9

10 Attachments Example 1page 677 of PoMath12.wmv Example 4_page 681_poMath12.wmv Example 4_page 681_poMath12_part2.wmv Curriculum guide question page wmv Curriculum guide question page _part_e.wmv