## Idea in the Classroom #5 – You are buying a car!

Check out this practical math assignment from Josh in Antigua!

# Financial Applications Project – You are buying a car!

Your task is decide on a car, establish your financial plan for the purchase, and determine (in the long run), if it is a good investment.

Part 1: The Decision

You are to make a list of the features (color, size, fuel economy, engine power, style, interior space, reliability, reputation, cost for repair, terrain type, etc, etc) that are important to you when choosing a car.

Based on your list of important features, choose a car that fits your needs.

Submit this part of the assignment as a ½ page rationale as to why you chose the car you did. You can submit your features in list form, but your reasons why you want the car you’ve chosen must be in full sentences. Your justification should match the list of features you want in a car.

Part 2: The Financials

You are to provide a detailed financial plan for the cost of car ownership. Read through the information below carefully.

Car loan

• Determine the cost (in \$EC) for your car.
• Assume you can obtain a loan from your bank for the full cost of the car at an annual interest rate of 7.2% compounded monthly over a term of 4 years. Determine your monthly payments. HINT – this is more difficult than you think
• Determine the total cost (with interest) that you will pay for the car. Note – this will be more than the sticker price of the car.

Depreciation

• As soon as you drive your car off the lot, it loses 15% of its original value, and decreases 12% thereafter per year.

Repairs

• At year 4 of car ownership, repairs start to become necessary. In year 4, car repairs cost 3% of the original price of the car and they increase 4% (of the original cost of the car) per year for each year thereafter.

Amortization

• Create an amortization table determining the principal owing on your car loan on a monthly basis. This will help you determine how much money you are losing on your car.

Present this information in a neat and clearly understandable way. It is preferred (but not necessary) that you used a spreadsheet program. Use the attached sheet as an example. Determine the value of the car for the first 12 years of ownership.

Part 3: Questions and Conclusions

• When considering the loan, what was the total price (principal plus interest) you paid for the car?
• What is the total cost of owning the car for the first year?
• You want to sell the car after 3 years, what do you still owe on your loan? Assume you can sell the car for its exact value at the time – what is your net loss?
• You want to sell the car after 8 years, and now your loan is paid off. Assume you can sell the car for its exact value at the time – what is your net loss? When answering this question, consider your total loan payments for the car and the cost to repair the car.
• Observe your monthly repair costs, and compare those to the monthly payments you were making. After what year does it make sense to sell the car and buy a new one?
• If, instead of buying a car, you invested your monthly payment into the same investment scheme, how much would you have at the end of 4 years? HINT – this is not as obvious as it seems
• What are the advantages of owning a car?