Me, Myself, My Money
Instructor’s Guide
Getting Wheels
Learning Objectives
Learning Standards
(grades 9-12):
■ Business and Economics
• Students identify the advantages
and disadvantages of purchasing,
leasing and renting. (National
Business Education Association –
Economic & Personal Finance)
Students will:
■ Explain the terms “capitalized cost,” “residual value,” and “money factor.”
■ Explain how capitalized cost and lease payments are calculated.
■ Identify the characteristics of a lease that will decrease the lease
payments and those that will increase the capitalized cost.
■ State the operating costs for which lessees are responsible.
■ State the advantages and disadvantages of leasing a car
versus buying a car.
• Students differentiate between
types of decisions and identify
those for which a formal decisionmaking process should be used,
and apply the decision-making
process to various types of
decisions at different stages of
the life cycle. (National Business
Education Association –
Economics & Personal Finance)
Presentation Suggestions
Use “Fast Facts” and “Alphabet Soup” to:
■ Explain the terms “capitalized cost,” “residual value,” and “money factor,” noting that “selling
price” is the negotiated sales price but capitalized cost is the actual amount paid over the life
of the lease term, which is more than the selling price.
■
■
■
■
■
■
Explain how the capitalized cost is determined – as the difference between the sales price
and residual value, which is then spread over the life of the lease using the money factor to
determine monthly payments. The monthly payment amount and number of payments are
used to calculate the capitalized cost.
State that a high sales price, low residual value, high interest rate or money factor, and long
lease term will all contribute to high monthly lease payments and greater capitalized cost.
Explain that because the residual value is used to calculate the capitalized cost, increasing the
residual value will decrease the lease payment amount. The disadvantage is that the lease-end
purchase price is greater.
State that leases contain statements regarding the maximum number of miles that can be
driven, and that exceeding the limit will result in financial penalties when the lease expires.
Discuss the advantages and disadvantages of leasing a car versus buying a car, noting that
the lessee is responsible for all expenses as if they owned the car and may be subject to
lease-end costs and charges for excessive wear and tear.
Complete the activity – Lisa Lessee – with the class.
Me, Myself, My Money
Getting Wheels
Instructor’s Guide
Lisa Lessee Hits the Road
Lisa Lessee is considering leasing a new car and is interested in a car with a
sticker price of $24,000.
Lisa negotiated a “price” of $22,000, but was told that the capitalized cost of the
car based on the lease terms is $23,200 and that the residual value is $2,000.
The lease requires 60 payments of $387 per month based on a 6% money factor.
No down payment is required.
Lisa is confused by all the lingo and numbers, and thinks she is paying more
than the $22,000 price she negotiated.
1. Explain to Lisa the term capitalized cost.
The capitalized cost is the total amount to be paid over the lease term, taking into consideration the length of the
lease and the money factor.
2. Explain to Lisa how the capitalized cost is calculated.
Capitalized cost is calculated by first determining the difference between the sales price and the residual value,
and then applying a money factor or interest rate to that amount over the life of the lease term to determine the
amount of the monthly payments. The amount of the monthly payment and number of payments over the life of
the lease are used to calculate the total amount paid – the capitalized cost.
In Lisa’s case, the capitalized cost is based on paying $20,000 ($22,000 negotiated price - $2,000 residual value)
over 5 years (60 payments) at an interest rate of 6%, which amounts to $387 per month: $387/month x 60 payments
= $23,200.
3. Explain to Lisa the term residual value.
The estimated value of the leased auto at the time of the last lease payment, and the amount required to purchase
the auto at the end of the lease.
4. How can Lisa reduce the capitalized cost of the lease?
Make a down payment, increase the amount of the monthly payment or reduce the lease term,
e.g., from five years to four or three years.
5. How can Lisa reduce the monthly payments?
Increase the residual value, lower the capitalized cost, lower the money factor or make (increase)
a down payment.
6. Explain to Lisa the disadvantage of increasing the residual value of her leased car.
If Lisa decides to purchase the car when the lease expires, increasing the residual value increases
the lease-end purchase price.
(continued on next page)
Me, Myself, My Money
Getting Wheels
Instructor’s Guide
Lisa Lessee Hits the Road (continued)
7. What other advice would you give Lisa about entering into a lease agreement?
Consider the number of miles allowed under the lease and any charges for excessive mileage, as well as any
potential lease-end charges such as those for excessive wear and tear and end-of-lease disposition costs.
In addition, Lisa should know that she is responsible for costs such as insurance, gas, routine repair and
maintenance, and other costs as if she owned the car.
8. Explain to Lisa the advantages and disadvantages of leasing a car.
An advantage of leasing a car includes the ability to get a new car when the lease expires, without having to
dispose of or sell the car. A disadvantage is that it may not be possible to return the car during the term of the
lease without paying a financial penalty.
9. Rather than lease a car, Lisa is now considering buying a car. Explain to her the advantages and disadvantages of
buying a car.
An advantage of buying a car is that of owning the car when the final payment is made. A disadvantage of
ownership is that the market value of the car has probably declined significantly.
10.Regardless of whether Lisa enters into a lease agreement or buys a car, what advice would you give her to keep her
costs down?
Make as large a down payment as possible, obtain a short-term loan or lease agreement – even if the monthly
payments are greater compared to longer terms loans and leases – and negotiate for a low interest rate.
Presentation Notes:
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