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# Financial Solutions for Buying, Selling and Renting Case Study

## Buy or Lease a Car

The first decision is to buy or lease a car. The Net Present Value (NPV), which is the sum of present values of all cash inflows and cash outflows (Garman & Forgue, 2017), the value of the investment has been calculated for both options by using the following formula (Brigham & ‎Houston, 2016).

## Scenario 1

The first scenario involves buying a car with the conditions given in Table 1.

Table 1. Conditions: Buy a Car.

 Car Value \$32,000 Rate 4% Down Payment \$10,000 Number of Years 6

Although there is no discount rate provided, it is assumed that the required rate is 4%, which is the rate charged by the bank or car dealer, for discounting future cash flows. The yearly cash flow given in Table 2 represents the depreciable amount of the car’s book value. The value of used Nissan Rogue after six years is estimated to be \$11,424, which is used for determining the depreciable value of \$20,576 and the depreciation amount allocated to each year as given in Table 3.

Table 2. NPV – Buying a Car.

 0 1 2 3 4 5 6 Cash Flow (10,000.00) (4,709.33) (4,709.33) (4,709.33) (4,709.33) (4,709.33) (4,709.33) Discount Factor 1.0000 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 Present Value (10,000.00) (4,528.21) (4,354.04) (4,186.58) (4,025.56) (3,870.73) (3,721.85) NPV (34,686.97)

Table 3. Depreciation Expense. Source: (Kelley Blue Book, 2018).

 6-Year Book Value \$11,424.00 Expected Depreciable Value \$20,576.00 Yearly Depreciable Value \$3,429.33

## Scenario 2

The second scenario involves leasing a car with the conditions given in Table 4. Table 4. Conditions: Lease a Car

 Car Value \$32,000 Rate 0.33% Down Payment \$3,500 Monthly Lease Payment \$360 Number of Months 72

The discount rate of 4% is adjusted every month as the lease payments are to be paid monthly as well as indicated in Table 5.

Table 5. NPV – Leasing a Car.

 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flow (3,500) -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 Discount Factor 1.0000 0.9967 0.9934 0.9901 0.9868 0.9835 0.9802 0.9770 0.9737 0.9705 0.9673 0.9641 0.9609 Present Value (3,500.00) (358.80) (357.61) (356.42) (355.24) (354.06) (352.88) (351.71) (350.54) (349.38) (348.22) (347.06) (345.91) 13 14 15 16 17 18 19 20 21 22 23 24 Cash Flow -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 Discount Factor 0.9577 0.9545 0.9513 0.9481 0.9450 0.9419 0.9387 0.9356 0.9325 0.9294 0.9263 0.9232 Present Value (344.76) (343.61) (342.47) (341.33) (340.20) (339.07) (337.94) (336.82) (335.70) (334.59) (333.47) (332.37) 25 26 27 28 29 30 31 32 33 34 35 36 Cash Flow -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 Discount Factor 0.9202 0.9171 0.9141 0.9110 0.9080 0.9050 0.9020 0.8990 0.8960 0.8930 0.8901 0.8871 Present Value (331.26) (330.16) (329.06) (327.97) (326.88) (325.80) (324.71) (323.63) (322.56) (321.49) (320.42) (319.36) 37 38 39 40 41 42 43 44 45 46 47 48 Cash Flow -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 Discount Factor 0.8842 0.8812 0.8783 0.8754 0.8725 0.8696 0.8667 0.8638 0.8609 0.8581 0.8552 0.8524 Present Value (318.29) (317.24) (316.18) (315.13) (314.09) (313.04) (312.00) (310.97) (309.93) (308.90) (307.88) (306.85) 49 50 51 52 53 54 55 56 57 58 59 60 Cash Flow -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 Discount Factor 0.8495 0.8467 0.8439 0.8411 0.8383 0.8355 0.8327 0.8300 0.8272 0.8245 0.8217 0.8190 Present Value (305.83) (304.82) (303.81) (302.80) (301.79) (300.79) (299.79) (298.79) (297.80) (296.81) (295.82) (294.84) 61 62 63 64 65 66 67 68 69 70 71 72 Cash Flow -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 -360 Discount Factor 0.8163 0.8136 0.8109 0.8082 0.8055 0.8028 0.8001 0.7975 0.7948 0.7922 0.7896 0.7869 Present Value (293.86) (292.89) (291.91) (290.94) (289.98) (289.01) (288.05) (287.10) (286.14) (285.19) (284.24) (283.30) NPV (7,727.84)

Although the NPV of both options is negative, it could be noted from Table 1 and Table 2 that the NPV of leasing a car is higher than the NPV of buying a car. Therefore, it is recommended that the first option should be rejected and the second option should be accepted. Moreover, it could be indicated that Option 1 requires a higher down payment as compared to Option 2. Therefore, it is not feasible to allocate more funds in the beginning to buy a car (Szczypinski, 2017). Therefore, it could be indicated that the probability of following the recommended option to lease a car is high.

## Sell or Lease a House

The second decision is to sell or lease a house. For this purpose, different assumptions are made regarding each option, which is described in the following analysis.

## Option 1

The first option provided in Table 6 is to sell the house, which has a value of \$300,000 (assumed) and the remaining mortgage amount is \$200,000. The current market value is \$320,000, which means that \$120,000 would be obtained that could be used as a deposit for buying a new house in the same geographical area after completing a three-year expatriate assignment in Dubai, UAE. It is also assumed that the residence in Dubai, UAE will be paid by the employer, which means that there will be a cost of living. Furthermore, \$120,000 can be invested in a saving account that will generate a return (Tucci, 2014). However, there is a financial consideration related to the future house price that could affect the outcome of this decision. The house price could be higher than the current market value, which would increase the lease obligation. Furthermore, it may not be possible to find a house in the same geographical area as per expectations that would also affect the outcome of this decision.

Table 6. Selling the House.

 Selling the House Home Value \$300,000 Mortgage Remaining \$200,000 Current Market Value \$320,000 Cash Received \$120,000 Deposit for the New House \$120,000

## Option 2

The second option is to continue the lease of the house. It is assumed that the remaining mortgage amount is \$200,000, and the lease period is three years. The rate assumed for the remaining mortgage is 4%, which indicates that the total lease amount is \$224,973 in the next three years. The expected yearly lease payment is \$74,991. The house can be rented out at \$1,700 per month for the next three years, which means that the yearly lease payment will be reduced by the \$54,591 as shown in Table 7. However, this decision needs to be evaluated by considering personal income and finances over the next three years (Gitman, Joehnk, & ‎Billingsley, 2014).

Table 7. Leasing the House.

 Lease the House Mortgage Remaining \$200,000 Rate 4% Period 3 Lease Payment Amount \$ 224,973 Yearly Lease Payment \$74,991 Rent \$20,400 Yearly Lease Payment Balance \$54,591

Based on the analysis, it could be indicated that selling the house is not a feasible option because of the uncertainty regarding the house price after three years. Therefore, it could be indicated that the probability of following the recommended option to continue the current lease of the house is high.

## References

Brigham, E. F., & ‎Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.

Garman, ‎E. T., & Forgue, R. (2017). Personal finance. Boston, MA: Cengage Learning.

Gitman, L‎. J., Joehnk, M. D., & ‎Billingsley, R. (2014). Personal financial planning. Mason, OH: Cengage Learning.

Kelley Blue Book. (2018). Web.

Szczypinski, S. (2017). The Business Insider. Web.

Tucci, P. A. (2014). The handy investing answer book. Canton, MI: Visible Ink Press.

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