10/10/23, 6:45 PM Chapter 5 Homework - assignment
Chapter 5
1. Vocabulary
The price of an asset being leased as specified in the lease agreement, which includes
the negotiated cost of the vehicle and any applicable fees and taxes, is called
the capitalized cost.
A closed-end, or walk-away, lease allows the lessee to merely return the vehicle at
the end of the lease period, provided that the preset mileage limit has not been
exceeded and the vehicle hasn’t been abused. A closed-end lease differs from an
open-end, or financial, lease. In an open-end lease, the lessee may be responsible for
an additional payment if the value of the car at the end of the lease period is less than
the lease’s residual value. If, at the end of the lease’s term, the market value of the car
is less than the residual value specified in the lease, then the lessee will be required to
pay this difference.
Depreciation represents the loss in the value of an asset that occurs during the period
of its ownership. It is calculated as the difference between the asset’s purchase price
and its subsequent sale price.
A lease is a contract and business transaction in which the user of an item, such as a
car or house, receives the right to use it in exchange for scheduled payments for a
fixed period of time. Unlike a cash- or loan-based purchase, a lease provides for the
use of the asset, but it does not result in ownership of the car or house. The provision
under which a lessee can purchase his or her leased car (or other asset) at the end of
the end of the lease period is called a purchase option. This provision will express
the automobile’s purchase price either as a fixed-market price or as the vehicle’s
residual value.
A rebate is an inducement to purchase that takes the form of a partial refund of a
car’s purchase price.
A vehicle’s residual value is its estimated value at the end of the lease period.
The sales contract is the agreement used to purchase a car that details the offering
price and all conditions of the offer; when the buyer and seller sign it, it establishes
the terms of the legally binding transaction.
The sticker price on a vehicle is the popular name given to the manufacturer’s
suggested retail price (MSRP), which is posted on a sticker on the vehicle’s window.
From a negotiating perspective, this number is effectively worthless, since it has
virtually nothing to do with the dealer’s invoiced cost for the vehicle.
2. Steps in the car-buying process
For many of us, purchasing a car is the first major purchase that we will make, as well
as the second-largest purchase, and the most frequent major expenditure that we will
make during our lifetimes. In contrast, purchasing a house is usually our largest, or
most valuable, major purchase, but most of us will buy many more cars than houses
during our lifetimes.
Due to their high costs and the fact that the majority, if not all, of these purchases are
made on credit, mistakes made during these transactions can be extremely expensive
and their effects felt for many years. Using a systematic process to evaluate these
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
about:blank 1/8
, 10/10/23, 6:45 PM Chapter 5 Homework - assignment
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
2 Test drive the car and meet the salesman at least once to ascertain if he or she is
someone you want to do business with.
3. How much car can I afford?
Before buying a car, it is critical that you determine both the complete price of the vehicle
and what you can afford to spend. This information is essential in deciding whether to
pay cash or finance the vehicle with a loan. The difference between these two methods of
payment, however, is the difference between paying the car’s full price versus making a
much smaller down payment and fitting the monthly payments into your budget.
There are two schools of thought about how much car you can afford. Financial experts
recommend that the amount of your car payment should not exceed 20% of your net
monthly income. Others suggest that if you can accommodate the payment in your
budget, then it’s acceptable—although you shouldn’t obligate yourself to eating rice
cakes for the next four years.
Amy is 55 years old, and her current gross monthly income is $2,800. Given an average
personal tax rate of 28% for her federal, state, and local taxes, Amy’s net monthly income
is $2,016. If she follows the advice of financial experts, what is the maximum amount
that she should spend to purchase a new vehicle? $40
Gross monthly Income = $2,800
Gross yearly Income = 2800*12 = $33,600
Personal Tax = 28%
Yearly tax paid = 0.28*33,600 = $9,408
Net annual income = Gross Yearly Income - Yearly Tax
Net Annual Income = 33,600 – 9,408 =$24,192
Net monthly Income = Net Annual Income/12 = 24,192/12
Net monthly income = $2,016
Not exceeding 20%
Net monthly Income = $2,016
Monthly tax paid = 0.20*2,016 = $403.2
Max car payment = $403
An alternative to the 20% rule is to evaluate your budget, determine a monthly payment
that you can reasonably afford, and then incorporate that information with the maturity
and interest rate of a possible loan to determine the value of the potential loan. When this
value is added to a saved amount of a down payment, you know the total amount that you
can reasonably afford to spend on a new car.
To review this process, consider the following case:
Amy’s Car-Buying Decisions
about:blank 2/8
Chapter 5
1. Vocabulary
The price of an asset being leased as specified in the lease agreement, which includes
the negotiated cost of the vehicle and any applicable fees and taxes, is called
the capitalized cost.
A closed-end, or walk-away, lease allows the lessee to merely return the vehicle at
the end of the lease period, provided that the preset mileage limit has not been
exceeded and the vehicle hasn’t been abused. A closed-end lease differs from an
open-end, or financial, lease. In an open-end lease, the lessee may be responsible for
an additional payment if the value of the car at the end of the lease period is less than
the lease’s residual value. If, at the end of the lease’s term, the market value of the car
is less than the residual value specified in the lease, then the lessee will be required to
pay this difference.
Depreciation represents the loss in the value of an asset that occurs during the period
of its ownership. It is calculated as the difference between the asset’s purchase price
and its subsequent sale price.
A lease is a contract and business transaction in which the user of an item, such as a
car or house, receives the right to use it in exchange for scheduled payments for a
fixed period of time. Unlike a cash- or loan-based purchase, a lease provides for the
use of the asset, but it does not result in ownership of the car or house. The provision
under which a lessee can purchase his or her leased car (or other asset) at the end of
the end of the lease period is called a purchase option. This provision will express
the automobile’s purchase price either as a fixed-market price or as the vehicle’s
residual value.
A rebate is an inducement to purchase that takes the form of a partial refund of a
car’s purchase price.
A vehicle’s residual value is its estimated value at the end of the lease period.
The sales contract is the agreement used to purchase a car that details the offering
price and all conditions of the offer; when the buyer and seller sign it, it establishes
the terms of the legally binding transaction.
The sticker price on a vehicle is the popular name given to the manufacturer’s
suggested retail price (MSRP), which is posted on a sticker on the vehicle’s window.
From a negotiating perspective, this number is effectively worthless, since it has
virtually nothing to do with the dealer’s invoiced cost for the vehicle.
2. Steps in the car-buying process
For many of us, purchasing a car is the first major purchase that we will make, as well
as the second-largest purchase, and the most frequent major expenditure that we will
make during our lifetimes. In contrast, purchasing a house is usually our largest, or
most valuable, major purchase, but most of us will buy many more cars than houses
during our lifetimes.
Due to their high costs and the fact that the majority, if not all, of these purchases are
made on credit, mistakes made during these transactions can be extremely expensive
and their effects felt for many years. Using a systematic process to evaluate these
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
about:blank 1/8
, 10/10/23, 6:45 PM Chapter 5 Homework - assignment
purchases helps reduce the potential of costly mistakes. The car-buying process can be
broken down into four major steps: research, select, buy, and maintain.
Step Activities
3 Inspect the vehicle for damage and missing items, such as the correct sound system,
missing floor mats, or damaged pieces of trim.
1 Determine the annual insurance premium on the brands and models being considered.
4 Change the oil, rotate the tires, and replace the windshield wipers as needed.
2 Test drive the car and meet the salesman at least once to ascertain if he or she is
someone you want to do business with.
3. How much car can I afford?
Before buying a car, it is critical that you determine both the complete price of the vehicle
and what you can afford to spend. This information is essential in deciding whether to
pay cash or finance the vehicle with a loan. The difference between these two methods of
payment, however, is the difference between paying the car’s full price versus making a
much smaller down payment and fitting the monthly payments into your budget.
There are two schools of thought about how much car you can afford. Financial experts
recommend that the amount of your car payment should not exceed 20% of your net
monthly income. Others suggest that if you can accommodate the payment in your
budget, then it’s acceptable—although you shouldn’t obligate yourself to eating rice
cakes for the next four years.
Amy is 55 years old, and her current gross monthly income is $2,800. Given an average
personal tax rate of 28% for her federal, state, and local taxes, Amy’s net monthly income
is $2,016. If she follows the advice of financial experts, what is the maximum amount
that she should spend to purchase a new vehicle? $40
Gross monthly Income = $2,800
Gross yearly Income = 2800*12 = $33,600
Personal Tax = 28%
Yearly tax paid = 0.28*33,600 = $9,408
Net annual income = Gross Yearly Income - Yearly Tax
Net Annual Income = 33,600 – 9,408 =$24,192
Net monthly Income = Net Annual Income/12 = 24,192/12
Net monthly income = $2,016
Not exceeding 20%
Net monthly Income = $2,016
Monthly tax paid = 0.20*2,016 = $403.2
Max car payment = $403
An alternative to the 20% rule is to evaluate your budget, determine a monthly payment
that you can reasonably afford, and then incorporate that information with the maturity
and interest rate of a possible loan to determine the value of the potential loan. When this
value is added to a saved amount of a down payment, you know the total amount that you
can reasonably afford to spend on a new car.
To review this process, consider the following case:
Amy’s Car-Buying Decisions
about:blank 2/8
