Financial Management

FINA 3000 – Project 2 – Buying a New Car – Due Date Listed in Sylalbus
Submit the completed project on D2L under the heading Assignments.
This class is “Financial Management”, but many of the techniques we study (such as time value of
money) are directly applicable to personal finance. This exercise is intended to introduce you to calculating
payments and locating some of the consumer information available on the internet. While the information
pertains directly to purchasing a vehicle, much of the same type of information is available for other major
consumer items.
Being informed is the key to receiving the “best deal” available whether you are purchasing a stereo system, an
automobile, or a home. Always do your homework when contemplating a purchase.
When planning to purchase a vehicle, first narrow your choices to a preferred set. The vehicle chosen is
primarily a function of personal preferences, so I can offer little assistance in that area (e.g., some people prefer
sports cars while others prefer pickup trucks). You should at least consider the safety and reliability of the
vehicle, but these may not be the primary determinants of your choice.
Regardless, you should be aware of several items before entering a showroom. First, get a copy of the
dealer’s invoice or other indicator of the price you should pay for the new vehicle. Second, estimate the value of
any vehicle you are plan to trade. Third, determine the interest rate you should expect to pay if you finance a
portion of the vehicle’s cost. Fourth, understand the “games” that salespeople play. (Remember, that the job of
a salesperson is to sell. They are not there to give the vehicles away. Sometimes their compensation is based on
commissions or bonuses that may be tied to the sales price of the vehicle. The “best price” for them is the
highest price you will pay. This does not make them “evil.” It is simply a fact that you should understand.)
The sites listed in this project are only a few of the ones that are available. I do not guarantee that the
information from these sites is the “best” available, but it is helpful. For the purpose of this project, you may
choose any NEW vehicle as your intended purchase. (Keep in mind that the project is more useful if you choose
a type of vehicle that you may actually consider purchasing in the foreseeable future.) To complete the project,
choose a vehicle you wish to “purchase” and follow the steps below. (NOTE: If you have trouble printing any
of the pages listed, close your browser. Then, restart the browser, go to the page, and try again to print.)
STEP ONE:
List your name and the year, make, and complete model of the vehicle you are researching. Briefly explain why
you chose this vehicle. (Choose the newest available vehicle for your model for this project.)
STEP TWO:
Although you are not actually purchasing the vehicle, it is good to understand the basic process of negotiating
with a salesperson. Several books, magazines, and internet sites give information about the car buying process.
For this project, I have given you a short “article” to read and you will need to access information from internet
sites. Read the summary, “The Car Buying Process,” that is the last two pages of this project description.
Write a four or five sentence paragraph that summarizes the main points from the article.
STEP THREE:
Research the safety characteristics of your chosen vehicle. (If you were actually planning to purchase a vehicle,
I would also suggest that you consider its reliability record. One of the better sources of reliability information
is Consumer Reports. Unfortunately, their internet service is fee based so we will not use it in this course.
(However, for around $5 per month you can access their reliability database. Considering the cost of vehicles
today, a $5 investment is probably warranted when you do decide to buy a car.) Two useful sites for
determining the safety ratings of various vehicles are those for the Insurance Institute for Highway Safety
(http://www.iihs.org/) and National Highway Traffic Safety Administration (https://www.safercar.gov/).
First, research the Institute for Highway Safety test results for your vehicle. Go to their internet site
(http://www.iihs.org/). Click on Ratings. Select the make and model of your vehicle, or choose the vehicle class
to which it belongs. Click on the model of your vehicle and record available results for small overlap, moderate
overlap, side, roof strength, head restraints and seats, and front crash prevention. (If your vehicle is not shown,
it has not been subjected to these tests. If your vehicle has not been tested, EITHER: (a) report results for an
older model of your vehicle; or, (b) report the test results for another vehicle made by the same manufacturer
which you believe is closest in construction to your choice.) You do not have to have results for all tests.
Second, go to the NHTSA site (https://www.safercar.gov ). Click on “Crash Ratings” and find your vehicle by
using the year/make/model/ search option. Record the frontal crash, side crash, and rollover ratings for your
vehicle. (NOTE: 5 stars is the best rating.) (If your vehicle is not listed, choose the nearest available model year
or the nearest vehicle by the same manufacturer.)
Summarize in a few sentences the safety characteristics of your vehicle. Indicate whether these ratings would
affect your decision if you were really planning to buy?
STEP FOUR:
Get the dealer’s invoice for the vehicle you would like to purchase and get an estimate of the value of your
trade-in. There are numerous sites which give “Dealer Invoice” information. Some offer free information.
Others charge varying fees. We use Kelley Blue Book’s site since it is free (another free site is
www.edmunds.com). I cannot say that it is completely accurate.
Go to the Kelley Blue Book internet site (https://www.kbb.com/). Click on “Price New/Used” and choose the
make and model for your vehicle. Select options and the click on “See Fair Purchase Price.” Record the MSRP
(manufacturer suggested retail price), the “fair purchase price,” and the dealer invoice (price the vehicle costs
the dealer).
Return to the initial page of the Kelley Blue Book internet site (https://www.kbb.com/). Click on “My Car’s
Value”. Select the year, make, and model of your trade-in vehicle. (Your trade-in vehicle is the vehicle you
currently drive. If you do not have a vehicle, choose a vehicle driven by a relative or friend.) Enter relevant
information about your vehicle. Record the trade-in value for your vehicle for excellent, good, and fair
conditions.
Return to the initial page of the Kelley Blue Book internet site (https://www.kbb.com/). Click on “Price
New/Used Cars.” Select the year, make, and model of your trade-in vehicle. Select relevant information about
your vehicle. Choose “Buy from dealer” and then “get used car price.” Record the suggested retail price for
your trade-in vehicle (this is the expected list price a vehicle like yours that is in good or better condition).
Another site with a reasonable estimate of the price for a new vehicle is CarsDirect.com. You can actually
purchase a car online at this site, so it gives you a firm price quote for many vehicles. The price is a good
“ballpark figure” of the price you could get at a dealer. Go to http://www.carsdirect.com. Click “New Cars.”
Select the make of the vehicle. Choose the model you want. (It may at some point in the process ask for your
zip code.) Click “Price it New.” Choose the style of vehicle and then choose options for your vehicle.
Record the “CarsDirect Price.” It may be called a “Target Price.” The “CarsDirect” price (or target price) is the
price they believe they can negotiate for you for the vehicle. (You may want to compare to Kelley Blue Book’s
“Fair Purchase Price.” Another site that gives expected prices for purchasing a vehicle is www.truecar.com.
Many dealers now have internet posted prices, but be sure to call and ask if there are additional fees that are not
included in the listed price.)
The Dealer Invoice and Retail prices for the new vehicle and the Trade-In and Retail values for the used vehicle
generally vary substantially. Usually you will find that the dealer will initially try to get you to pay as close to
Retail for the new car as possible, while offering you as little as possible for your vehicle. This is where
negotiating skills are valuable. If you use the “CarsDirect” price as your expected price for the new vehicle, the
trade-in value of your vehicle is a good estimate of what you should expect the dealer to allow you for your
trade-in vehicle. In effect, you are operating on “wholesale” prices for both vehicles. (However, you can
sometimes get a better price than listed on “CarsDirect.” You should only use this price as an estimate.)
Now, calculate an estimate of the “drive-out” net cost for the vehicle. Follow the format in the sample project
using the following information.
DOCUMENT PREPARATION AND RELATED FEES
Most dealers will charge document preparation, registration, and other assorted fees. The document preparation
fees vary across dealers normally ranging from $399 to $899. The registration fee is often around $99. For this
project, assume the total of these fees is $798. (Watch these fees carefully. They vary from dealer to dealer.)
TAXES
The difference in the price you pay and your trade-in value is taxable. (Note: Cash rebates are generally treated
as “down payments,” so they do not lower your tax basis. “Dealer incentives” are usually considered a price
discount and do lower your taxes.) We will calculate taxes on the difference in the trade-in value for your used
vehicle and the “CarsDirect” price for the new vehicle. (Keep in mind that the dealer’s documentation will
generally start from the MSRP price, so your trade-in value will show up as an “inflated amount” to account for
the “discounted” price of the vehicle.) Multiply the difference in the “CarsDirect” price and the trade-in value
by 0.07 to calculate the tax. We are using a 7% tax rate for illustration purposes.
TAG, TITLE, and RELATED FEES
These fees usually total less than $50. For this project, assume the total for these fees is $46.
PAYOFF FOR TRADE-IN
Remember that you will have to add into the “cost” any payoff that you have for your trade-in. For this project
assume that you still owe the equivalent of one-half of the trade-in value for your used car.
STEP FIVE:
Go to http://www.bankrate.com/loans/auto-loans/current-auto-loan-interest-rates/ to get current auto loan rates.
Scroll down the page and record the 60-month new car and 48-month new car rates. For this project, assume the
rate for 72 months is the 60 month rate plus 0.50%. (Always check to see if the car manufacturer is offering
special rates. The special rates may be better than the rates available elsewhere. However, note that if you take
special financing offers, you sometimes do not get the cash rebates or dealer incentive discounts.)
STEP SIX:
Use the pricing and loan rate information you have to estimate the monthly payments you would make if you
financed the “amount to be financed” that you calculated in STEP FOUR. Estimate your payments based on
financing the balance for 48, 60, and 72 months. Use the interest rates found in STEP FIVE and interest rates
1%, 2%, and 3% higher than that from STEP FIVE. This means you will calculate twelve payments. (NOTE:
There are several sites with loan calculators available. One can be found on the page in Step Five.
FORMAT – Project Part Two
The format you should follow for your report to me is shown on the next page. Please submit the
completed project through D2L under the heading Assignments.
YOUR NAME
FINA 3000 – Class Section
DATE
STEP 1. Vehicle Make, Model, and Year and Why It Was Chosen (remember to use a new vehicle)
STEP 2. Car Buying Process Summary
STEP 3. Vehicle Safety Summary and Discussion
STEP 4. Pricing Information
NEW CAR: List Year, Make, and Complete Model Description
Total Dealer Invoice
Total Dealer Retail (MSRP)
USED CAR: List Year, Make, andModel
Trade-In Value: Excellent, Good, Fair and the one that you think fits your car.
Retail Value
CALCULATION OF “DRIVE-OUT” PRICE
Show your calculation of the price based on the information given to you in STEP FOUR of
the project. (An example is shown below.)
EXAMPLE:
New car price (from CarsDirect or other source) $21,899
Subtract Trade-in value (old vehicle) $ 3,000
Equals Net Difference $18,899
Add Document Preparation and Related Fees $ 798
Equals Total Before Tax, Tag, and Title $19,697
Add Taxes (use 7% rate: In this case: 19,697 X 0.07 = $1,379) $ 1,379
Add Tag, Title, and Related Fees (assumed to be $46) $ 46
Equals total “Drive-out” price (not including trade-in payoff) $21,122
Plus payoff on trade-in (assume ½ of trade-in value is the payoff) $ 1,500
Equals Amount to be Financed (assume no down payment beyond trade-in value) $22,622
STEP 5. Interest Rates
List the Current Interest Rates for New Vehicle Purchase for 48, 60, and 72 months.
(Example below uses 4.48%, 4.51%, and 5.01% as the rates. Your rates may differ.)
STEP 6. Calculate the payments. Example: Based on “amount to be financed.” (Use the current rates you
found in Step 5 in your project, not the ones below.)
Payments Current rate +1% +2% +3%
4.48% 5.48% 6.48% 7.48%
48 months 515.66 525.90 536.27 546.76
4.51% 5.51% 6.51% 7.51%
60 months 421.85 432.21 442.73 453.41
5.01% 6.01% 7.01% 8.01%
72 months 364.43 375.02 385.79 396.75
The Car Buying Process
Various “methods” are used by car salespeople. In general, however, a description of the process can be
condensed into a simple set of steps (which are actually taught to many salespeople during their training
sessions). The number of steps varies according to the source, but the basics are virtually the same.
Remember, car salespeople are not “evil.” They are simply doing their job. To get the “best deal,” you must
also work.
Step One: Establishment
Most people are more likely to buy if they feel comfortable with the salesperson. For that reason the
salesperson is urged to quickly establish a “relationship” with you. A firm handshake, name exchange (usually
including the repeating of your name), and an introduction to any other parties with you is compulsory. A good
salesperson will pay equal attention to spouses (or significant others), but often will pay less attention to
someone brought along to “help you” (unless the other person is a party to the deal such as a co-signer).
Step Two: Investigation
Here the salesperson will try to determine your interests. A good salesperson will ask questions to assess your
tastes, financial characteristics, and intentions regarding time of purchase. Beyond an assessment of your
tastes, questions may include some of the following. How much do you want your payments to be? How much
do you want to pay? How much do you want for your trade-in? How much do you plan to pay down?
(Usually the less information you give at this stage, the better off you will be.)
Step Three: Presentation and Demonstration
This step usually starts with the isolation of the vehicle. This is done to focus your interests. The salesperson
will often lead you around the vehicle pointing out its styling, safety, and convenience features. This is to let
you know as much about the vehicle as possible before you drive it.
The demonstration phase consists of your driving the vehicle. Usually, the salesperson will go with you.
However, many dealers will let you drive the vehicle alone if you provide a copy of your driver’s license and
proof of insurance. Driving the vehicle without the salesperson allows you and any others in your party to talk
openly about what you like about the vehicle without fear that it will later be used against you in negotiations.
During this phase carefully check the sticker price and look for any “dealer add-ons.” Common add-ons
include fabric protection, paint sealant, dealer prep, etc. Most of these items can be negotiated down to zero if
the vehicle is in sufficient supply.
Step Four: “If I, Would You?” (Negotiation and Write-up)
If you indicate that you want to think about the purchase or leave to drive a competitor’s vehicle, the
salesperson will usually try to move negotiations forward by asking if you are willing to buy the car today if
you are offered a great deal. This is the true start of the negotiation phase. If you are really interested, tell them
that you will buy if the deal is good enough. Otherwise, you usually will not be offered the “best deal possible”
because the dealer is afraid you will take the offer elsewhere to use as a bargaining chip.
Often at this point the salesperson will ask for the keys to a potential trade-in vehicle. Be smart regarding what
you leave in a vehicle. Although most dealers will not allow employees to rifle through your belongings, they
are trained to notice all that is “in plain view.” Don’t be surprised if after the test drive the salesperson begins
to talk about fishing or camping if you leave a copy of Field and Stream in your seat. (Sometimes copies of
flyers or printouts with information for competing vehicles may be strategically left in view to let the dealer
know that you are not “locked-in” on their vehicle.) Often, you will not see your keys again for a while.
Dealers seem to think that holding your keys increases your commitment. If you start to leave, it also gives
them time to send the manager to ask what is wrong or try to switch you to a different salesperson to try to help
restart negotiations. If this bothers you, remember that the keys are yours and you have every right to ask for
them. If the salesperson returns and says something about the value of your car, the test drive is over. Ask for
the return of your keys. If they are hesitant, refuse to negotiate until the keys are in your hands.
In most instances, expect that the salesperson will constantly go back and forth to the “sales manager” for
approval in the negotiation stage. Although some of this is necessary, much of it is grandstanding. Again, this
makes it appear that the salesperson is “on your side” since they are battling so hard with the sales manager to
get you a great deal. Also, it is not uncommon during negotiations for the “sales manager” to make an
appearance and tell you how tough a negotiator you are. Do not fall prey to this form of flattery. Stick to your
guns. One strategy often used by customers is getting up to leave because they are tired of negotiating.
Remember, this only works if you are willing to walk away. If your bluff is called and you stick around, the
salesperson knows that you are interested and probably will pay a price close to that currently “on the table.”
One method of negotiation (which some dealers truly dislike) is to negotiate only on the basis of the “bottomline” or “drive-out” price. To deal in this manner, you need to know all “required” fees such as sales taxes, and
license and inspection sticker fees. Always be wary of any “add-in” fees that often “appear” when the deal is
written-up. (A common example is document preparation. This basically is a way for the dealer to increase the
profit on the vehicle. Document preparation generally should not be a separate fee if you are negotiating on a
“drive-out” price basis.)
Finally, never sign anything until the deal has been clearly delineated. When the written deal is placed in front
of you, ask questions about anything that appears different from what you negotiated. Sign the documents only
if you are completely satisfied that the numbers reflect your negotiations. (Often I sign only after adding a line
that the deal is contingent upon my receiving financing terms which I deem acceptable. In effect, you can
always still walk by indicating that you are unhappy with the financing terms offered. This also makes the
dealer more inclined to offer you the best interest rate possible.)
Step Five: Closing
At this point you are usually escorted to the Business Office (or finance manager). Often the first loan rate you
are offered is not the best available. If you have done your homework and checked rates from other sources,
you will know. If you are offered a rate you deem too high, simply tell the finance representative that you can
do better elsewhere. Usually, they will “try again” until they locate some “special rate” which is at least
equivalent to what you can find elsewhere.
At this time you are generally also offered some range of credit life, health, accident, and disability insurance.
Usually the rates for such products are very high. You can often get better rates (or higher coverage limits) by
visiting your insurance agent. Also, you may be covered by other policies to an extent which would make these
products redundant. However, you must make this decision.
Next, you will usually also be offered an extended warranty contract. There is a question as to how necessary
the contract is, but this is a decision that only you can make. Keep in mind the price of these contracts is
negotiable. On a recent purchase, the initial quoted price was $2,100. The final agreed upon price was $895.
You may also be offered tire warranties, service contracts, etc. Again, the “true value” of many of these “addons” is open to debate. Do not allow yourself to be pressured into buying something you do not want.
At this point, the “final” documents will be printed and you are asked to sign. Again, read carefully and be sure
that the documents reflect exactly what you expected. If there are questions, clear them up before you sign.
NOTES:
Never change from a plan to purchase to a leasing arrangement simply to have lower monthly payments. A
lease may make sense but you should carefully consider this alternative.