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COMM 298/COMR 473 1 Personal Finance Case Introduction David recently graduated high school, and it is time for his next big adventure - going to university. After a vigorous application process, he is thrilled to attend the UBC Sauder School of Business in the fall. Going to UBC has been a lifelong dream of David’s, and he cannot wait to be making new friends, taking interesting courses, and exploring UBC’s beautiful campus. Unlike many first-year students, David has decided not to live in the first-year residences and would commute from his home in Port-Coquitlam. Although David can enjoy the luxury of home-cooked meals and having his own space, commuting from Port-Coquitlam poses some additional difficulties. Specifically, David must determine how he will commute to and from campus each week. At first, David considered making use of the subsidized U-Pass and public transportation as his main form of transportation. However, after taking one SkyTrain and two buses followed by a 20-minute walk, David quickly realized that this commute would not be sustainable in the long run. Therefore, he decided to use the savings from his previous part-time summer jobs to buy a car - his first adult purchase! He hopes to carpool and provide rides to other students. This will be better for the environment and allow him to use the HOV lane. David’s Plan After a quick internet search and budgeting exercise, David recognized that purchasing a brand- new car was much more costly than anticipated. He also noted that many dealerships were offering a zero down payment option. Intrigued by the idea of not having to pay upfront, David decided to purchase the car with both the zero down payment option and the cheapest monthly payments. After eagerly introducing this plan to his parents, who are both experienced financial advisors, they recommended that David should think through this plan much more carefully and consider the different ways to purchase a car. Since David is a student with a credit score of 630, he will not qualify for most zero-down payment options. Therefore, based on his current financial situation and credit score, they recommended that he carefully considers the following aspects involved with purchasing a car: • The car brand (year & model) • The down payment amount • The monthly payments and effective periodic rate • Comparing the different options https://www.consumer.equifax.ca/personal/education/credit-score/what-is-a-good-credit-score/ COMM 298/COMR 473 2 After spending a few weeks following his parents’ advice and researching the points above, David feels much more confident about purchasing a car. However, David still feels a bit overwhelmed by all of the options, and as a reference, he decides to further narrow down his list by asking two friends about what they drive. Friend #1: Sam Sam is a second-year student in the UBC Faculty of Science. She was gifted a 2022 Honda Accord Sport from her parents for achieving honour roll status in her first year of university. The cash price for a 2022 Honda Accord Sport can be found on the website. Remember to add all provincial and federal sales taxes. Honda Canada offers a 4.67% APR, compounded monthly, 72-month loan. To be approved for dealer financing, David will have to pay $5,000 as a down payment. Therefore, he would pay the remaining amount with the 72-month loan using monthly installments beginning one month from now. Friend #2: Lucy While driving with his parents, David noticed that gas prices have increased significantly over the past few months. He realized that he might be able to save some money by purchasing an electric vehicle (EV). His friend Lucy also recently bought an EV, and she continues to rave about how much she saves on gas every month. David decided to do some more research and discovered that the most affordable EV is the Nissan Leaf SV. The price can be found on the on this website and excludes all sales taxes. The Federal Government provides incentives for the purchase of EVs, and the British Columbia Provincial Government also provides incentives. These incentives can be used to reduce the sales price. Assume that these incentives will be paid out immediately by the governments; therefore, David must cover the remaining amount, through monthly loan payments beginning one month from now. Nissan offers a 6.24% APR, compounded monthly, 60-month loan. No down payment is required. David’s Objective: As David has not yet taken COMM 298 he needs help choosing between these two alternatives. At first, David decided to discount the cash flows by the same amount as the car’s APR for each option. However, his parents quickly pointed out that this strategy is incorrect as this rate should reflect David’s personal discount rate, which is the opportunity cost if he would have paid for the car upfront with his own funds. David and his parents discussed that if that was the case he could have borrowed the funds from them, and they would have to withdraw funds from their savings, which they estimate can earn an effective rate of 8% per year, on average. https://carcostcanada.com/Canada/Prices/2022-Honda-Accord-Sedan/35248#:%7E:text=The%202022%20Honda%20Accord%20is,at%20a%20very%20reasonable%20%2434%2C920. https://www.canadadrives.ca/blog/car-guide/car-sales-tax-across-canada https://carcostcanada.com/Canada/Prices/2022-Nissan-LEAF/34345#:%7E:text=We%20have%20all%20the%20pricing,for%20the%20LEAF%20SV%20hatchback. https://www.canadadrives.ca/blog/car-guide/car-sales-tax-across-canada https://tc.canada.ca/en/road-transportation/innovative-technologies/zero-emission-vehicles/light-duty-zero-emission-vehicles/eligible-vehicles https://electricvehicles.bchydro.com/incentives/EV-incentives-in-BC https://electricvehicles.bchydro.com/incentives/EV-incentives-in-BC COMM 298/COMR 473 3 Case questions: Part 1: (Interest Rates, Monthly Payments, Amortization Tables, Comparing options) 1. For each option, convert the APR rates (contract rates) and the effective rate (personal rate) to an effective monthly rate 2. Based on the calculated effective monthly contract rate, determine the monthly payments for each option. 3. For each option also include an amortizable table as a part of your solution. For simplicity, this amortization table can be created on Excel, and should follow a similar format to the example below. [Please use a bank auto loan calculator from a bank, with your numbers, to verify that your calculations are correct! Add a screenshot in a tab on your Excel file.] Period Beginning Principal Payment Interest Payment Principal Payment Ending Principal Month 1 ……. Month 72 4. Now that you have calculated the monthly payments for each vehicle, the last step is to compare the two options and make a recommendation. To do this calculate the PV of the monthly payments from 2. and discount them to PV using David’s personal rate converted to a monthly rate. Compare this PV to the purchase price, including tax (current value) of the vehicle. The option where the vehicle value exceeds the PV of the loan payments by the most, is the best option. Part 2: (Additional costs/benefits to consider, including ESG factors) In Part 1 above, David only considered only the loan payments, subsidies and the initial value of the car to determine which vehicle to purchase. However, to make a more informed decision, there are other benefits and costs (both qualitative and quantitative) to be considered. Discuss some additional factors that David should consider when purchasing a vehicle. This discussion should include, but should not be limited to environmental factors. [Hint: for inspiration, consult this Sustainable Purchasing Guide for Motor Vehicles.] Case Deliverables: (one submission per group) 1. On Canvas submit the Excel file template with your calculations and screenshots from the loan calculator. 2. On Canvas submit a PDF file with your presentation. The presentation should be 10 slides max and should show and summarize your findings from Part 1 and your answer to Part 2 - other factors (incl. 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