Question

CENGAGE MINDTAP Assessment activity: Chapter 05-Making Automobile and Housing Decisions someone else make their financing decision? Consider the following scenario: Should Jacy Lease or Purchase? Jacy is considering the purchase of a Toyota Prius and has negotiated a final price of $19,895. He's trying to decide whether to lease or purchase the vehicle If he leases, he'll have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle's cost, and monthly payments of $270 over the four-year term of the closed-end lease. The Prius will have a residual value of $7,958. On the other hand, if he buys the Prius, hell have to make a 10% down payment, pay sales tax equal to 6% of the vehicle's price, and make monthly payments of $404 charges 4% interest. four-year loan that on a Be aware that funds used as down payments and security deposits incur an opportunity cost of they could have earned interest for Jacy over the period of the lease or loan. 5%, as Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase and then recommend the best strategy for Jacy. To complete the worksheet, enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) activity: Chapter 05-Making Automobile and Housing Decisions e purcriase anu hen recommenu une best surauegy 1or Jacy. To Complete ue worksrieet, enter u values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS LEASE Item Description Amount Initial Payment Capital Cost Reduction 1a. 1b. Security Deposit Total Initial Payment 1c. Number of Months in Lease 2. Monthly Lease Payment 3. 4 Total Payments over Lease Term 5. Opportunity Cost of Initial Payment Estimated End-of-Term Charges 6. 0.00 Total Cost of Leasing 7. PURCHASE 8. Purchase Price 9. Down Payment 10. Sales Tax on Purchase 11 Monthly Loan Payment 12. Total Payments over Term of Loan 13. Opportunity Cost of Down Payment 14. Estimated Vehicle Value at End of Loan 15. Total Cost of Purchase ype here tO search

Answer 1

AUTOMOBILE LEASE VS. PURCHASE ANALYSIS
LEASE	Item Description	Amount
	Initial Payment
1a.	Capital Cost Reduction @ 10%	$1,990
1b.	Security Deposit	$500
1c.	Total Initial Payment	$2,490
2	Number of Months in Lease	48
3	Monthly Lease Payment	$270
4	Total Payments over Lease Term	$12,960
5	Opportunity Cost of Initial Payment 5% Interest over 4 years ($2490*5%*4)	$498
6	Estimated End-of-Term Charges	$0
7	Total Cost of Leasing 1a + 4 + 5	$15,448
PURCHASE
8	Purchase Price	$19,895
9	Down Payment @ 10%	$1,990
10	Sales Tax on Purchase @ 6%	$1,194
11	Monthly Loan Payment	$404
12	Total Payments over Term of Loan	$19,392
13	Opportunity Cost of Down Payment 5% Interest over 4 years ($1990*5%*4)	$398
14	Estimated Vehicle Value at End of Loan	$7,958
15	Total Cost of Purchase 9 + 12 + 13 - 14	$13,821
Hence, it is a better recommendation to purchase the vehicle considering lower cost by $1,626.

Answer 2

•	If they rent, the builder will require monthly rental payments of $1,100 and a security deposit equal to two months of rent.
•	Since they want to be protected against the possible loss of their possessions, they will purchase a renters’ policy of $200 every six months, while a more comprehensive homeowners’ policy will cost 0.5% of the home’s value per year.
•	Money used to fund the unit’s security deposit could otherwise be invested to earn 5% per year after taxes. Funds expended for a home’s down payment and closing costs also incur an opportunity cost.
•	If the unit is purchased, it will cost $85,000 and will require a 20% down payment. The loan will carry an interest rate of 6%, a term of 30 years, and monthly payments of $408. The closing costs associated with the unit’s mortgage will be $3,500.
•	The property taxes and the maintenance and repair expenses on the unit are estimated to be 3% and 1% of the unit’s total price, respectively.
•	Your ordinary income is taxed at the rate of 28%, and you’ll be willing to itemize your tax deductions in the event that you purchase your new home.
•	Financial publications report that home values are expected to increase by 3% this year due to inflation.

RENT-OR-BUY ANALYSIS FOR HOUSING	$ Amount
COST OF RENTING
Security deposit
Annual rental cost
Renter’s insurance
Opportunity cost on security deposit
Total Annual Cost of Renting:
COST OF BUYING
Monthly mortgage payment
Annual mortgage payments
Property taxes
Homeowner’s insurance
Maintenance expenses
Opportunity cost of down payment and closing costs
Total costs
Less
Reduction of loan principal
Tax savings on mortgage interest deduction
Tax saving on property tax deduction
Total deductions
Annual after-tax cost of homeownership
Estimated annual appreciation in home value
Total Annual Cost of Purchasing:

Based on this analysis, Akiko and her husband should:

Rent the home, as its total cost is less than the total cost of purchasing

Purchase the home, as the cost of purchasing is greater than the cost of renting

Purchase the home, as the total cost of purchasing is less than the cost of renting