Assignment

• + A detailed and complete analysis for the two problems is required; unnecessary or additional details may be included in the project appendix.
• + All documents, including any work conducted on excel spreadsheets should be showed the works.
• + The fun project should be typed, not hand-written, and presented professionally.
• + Please demonstrate your solution in a simple and easy way to follow. Think of it as a solution/presentation you were asked to provide/deliver to one of your clients, who are financially illiterate.

(50 Points)

Q1. One of my of my students is graduating soon. She accepted a job offer where she will be living away from her family for the next couple of years. She is in the market looking for a new car and she needs your help on whether she would finance or lease her new car. Since she does not know yet if she is going to stay in the new job or not, she wants a short term commitment, let’s say three years.

She is currently looking at the 2016 Toyota Corolla. Based on the Finance and Lease Offers attached and the fact that her opportunity cost is 7%, what is your recommendation? To Finance or Lease? A detailed and complete analysis is required to support your claims.

Here is a list of the things that you have to take in consideration to better analyze this problem:

1. Her credit score qualifies her for the offer.
2. If the car is finance, she has to sell it back to the dealership or to a private-party.
3. If the car was rented, she has to return it to the dealership without worrying about finding someone to buy it.
4. The dealership will buy the car back from her at the Trade-in Value, while the private party will pay the Private Party Value of it. You can find more about Trade-in and Private Party Values in Kelly Blue Book. (Note: use value for a 3-year old (2013) Toyota Corolla for that purpose).
5. Pay attention to the maintenance cost under the Finance and Lease options, as it may change your answer. To get more details how much it costs to maintain the corolla over the 3-year period, go tohttp://www.edmunds.com/toyota/corolla/2016/sedan/cost-to-own/
6. Finally, assume that she will not drive more miles than what the lease option dictates.

Note: feel free to make any other necessary assumptions to solve this problem. Just do not ignore any of the items list above. For instance, don’t assume that you will drive the car for three full years without maintain it.

(100 Points)

Q2. Congratulation on your graduation and your new job!!! You are now 25 years old trying to plan for your retirement. You decided to start saving as soon as you receive your first paycheck at the end of this month. Your current annual salary is $40,000 and you plan to save 15% of your monthly income after tax. For the first 5 years of your career, you are not expecting any pay rise; however a 3% annual raise is expected until you retire at the age of 65. The following major events in your life should be considered when planning for your retirement:

• In 10 years, from today, you will buy a house for $300,000 financed at 6% for 30 years with 10% down payment. (You will sell the house for $350,000 when you retire.)
• You are expecting to inherit $250,000 in 20 years from your parents.
• You are planning on getting married by the age of 30 and having your first and only child by the age of 34. It is your responsibility to secure part of your daughter’s future as well. Hence, when she is 18 years old, she will need $30,000 (annually) for college tuition and $30,000 (annually) for her living expenses for the next four years while attending college. Both tuition and living expenses are due by the beginning of each year. (Assume that your wife does not work, but you will file for taxes jointly after marriage. Use the personal income tax schedules presented below for that purpose).

Your full retirement age is 65 and you plan to retire then. You believe that you will live an additional 20 years post-retirement and, by the time you retire, you would like to have the following:

• A monthly income of $4,500 for 20 years.
• $500,000 savings in cash for medical purposes the day you retire. You can continue earning interest on this account.
• A monthly payment for a beachfront house with a value of $1,000,000 financed at 6% for 20 years and 25% down payment.

Your required return is 7% and that is equivalent to what you can earn as a return on your savings. By the time you retire, are you falling short on your retirement savings? What is your shortage or surplus?

Single:

Married Filing Jointly or Qualifying Widow(er):

Note: Assume that tax bracket will remain the same until you retire.