own a home or car chapter 6. 6.1 borrowing to buy a home goals calculate the down payment, closing...
TRANSCRIPT
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OWN A HOME OR CAR
Chapter 6
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6.1 Borrowing to Buy a Home
Goals Calculate the down payment, closing costs, and
mortgage loan amount Calculate the total interest cost of a mortgage loan Calculate the savings from refinancing mortgages
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The Total Cost of buying a home includes the purchase price, the cost of borrowing money for the purchase, and the closing costs
Most people make a cash down payment, or a percentage of the total cost of the house paid at the time of purchase, to their lender.
6.1 Borrowing to Buy a Home
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A mortgage loan is a loan taken with a bank or other lender for the purchase of a new home.
The money borrowed is called the Principal
A mortgage gives the lender the right to take the property if the loan is not repaid as agreed.
Common terms of mortgages are 15, 20, and 30 years
6.1 Borrowing to Buy a Home
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Closing Costs are fees and expenses paid to complete the transfer of ownership of a home.
Closing costs typically include legal fees, recording fees, title insurance, loan application fees, appraisal and inspection fees, land surveys, prepaid taxes, and prepaid interest charges known as points.
Interest rates and closing costs vary among lenders, so it pays to compare when looking for a lender.
6.1 Borrowing to Buy a Home
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To calculate the amount of a loan you need, subtract the down payment from the purchase price.
Mortgage Loan = Purchase Price – Down Payment
To calculate the amount of money you need to buy a home, add the down payment and the closing costs.
Cash Needed to Buy a Home = Down Payment + Closing Costs
6.1 Borrowing to Buy a Home
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Hilda Mikon is buying a home for $74,000. She will make a 20% down payment and estimates closing costs as: legal fees, $950; title insurance, $140; property survey, $250; inspection, $175; loan processing fee, $84; recording fee, $740. What amount of mortgage loan will she need? What amount of cash will she need when she buys the house?
Find the Down Payment $74,000 x .20 = $14,800
Find the amount of the mortgage loan $74,000 - $14,800 = $59,200
Find the total closing costs $950 + $140 + $250 + $175 + $84 + $740 = $2,339
Find the cash needed to buy a house $14,800 + 2,339 = $17,139
6.1 Borrowing to Buy a Home
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Check for Understanding - Page 223 A & B
Get out Whiteboards
6.1 Borrowing to Buy a Home
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Homework
Workbook pg. 77 #1-5
6.1 Borrowing to Buy a Home
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There are many different types of mortgages. The two most common are… Fixed Rate – Same Interest Rate for the Life of the
Loan
Variable Rate – The Rate of Interest is based on the Interest Rate Economy
Most mortgages are repaid in equal monthly payments
Part of the payment goes to principal and part goes to interest
6.1 Borrowing to Buy a Home – Con’t
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Get a computer and log onto www.google.com. In the search type Mortgage Amortization and click on the first link. (bankrate.com)
Your screen should look like this
6.1 Borrowing to Buy a Home – Con’t
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6.1 Borrowing to Buy a Home – Con’t
EnterMtg Amt
120,000
Term 30 years
Rate 5.25
Start Date Jun 1, 2009
Monthly Pmts? $662.64
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Homework Mortgage Amortization Worksheet
6.1 Borrowing to Buy a Home – Con’t
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Goals Calculate the costs of home ownership Calculate the costs of renting a home or apartment Compare the costs of renting vs. owning
6.2 Renting or Owning a Home
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COST OF HOME OWNERSHIPAfter a home is bought, homeowners have
many outgoing expenses. These include Property Taxes Repairs Maintenance Utilities Insurance Mortgage Interest And special services such as trash pickup
6.2 Renting or Owning a Home
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Two other less obvious expenses include depreciation and loss of income on the money invested in the home.
Depreciation is the loss in value of property cause by aging and use. Examples of depreciation
Weathering of a roof Change of Home Styles Home becoming too expensive to heat and cool
Most homes depreciate about 1% to 4% of its original value per year
6.2 Renting or Owning a Home
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Loss of Income occurs because the money initially invested in buying the property (down payment and closing costs) could have been deposited into an investment account and earned interest.
One financial benefit homeowners have is that they may include the interest they pay on their home mortgage and their property taxes as itemized deductions on their income tax returns.
6.2 Renting or Owning a Home
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Take a look at Example 1 on page 230
6.2 Renting or Owning a Home
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The Krafts want to buy a home. Their estimated first year expenses are: mortgage interest, $6,848; Property Taxes, $3,782; Insurance, $560; Depreciation, $1,790; Utilities, $1,300; Maintenance and Repairs, $2,050. They estimate lost interest income on savings to be $1,562. Income tax savings are estimated to be $1,320. Find their net cost home ownership for the first year.
6.2 Renting or Owning a Home
Add all the expense items
$6,848 Mortgage Int.
$3,782 Property Taxes
$560 Insurance
$1,790 Depreciation
$1,300 Utilities
$2,050 Maint & Repairs
$1,562 Lost of Income
$17,892 Total Expenses
Subract the tax savings
$17,892 Total Expenses
- $1,320 Tax Reductions
$16,572 Net Cost
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The Sutter family is building a home for $87,000 on a lot they own. They estimate their expenses for the first year to be: Mortgage Interest, $5,788; Property Taxes, $1,904; Insurance, $347; Lost Interest Income, $1,140; Depreciation, 2% of their home’s cost; Maint. and Repairs, $900. The cost of heating, electricity, and water is estimated to be $1,860. The Sutter’s expect to save $1,050 in income taxes as a result of owning a home. What will be the net cost of the home the first year?
6.2 Renting or Owning a Home
Add all the expense items
$5,788 Mortgage Int.
$1,904 Property Taxes
$347 Insurance
$1,140 Lost Interest Income
.02 x 87,000 =
$1,740
Utilities
$800 Maint & Repairs
$1,860 Utilities
$13,679 Total Expenses
Subract the tax savings
$13,679 Total Expenses
- $1,050 Tax Reductions
$12,629 Net Cost
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COST OF PROPERTY RENTALFinancial Advantages of Rental
Not having to pay a significant down payment Earning interest on money that would be used for a
down pmt More predictable housing costs No maintenance costs
Financial Disadvantages of Rental No federal income tax benefits Do not build equity Usually pay a one time security deposit and is not
guaranteed in return.
6.2 Renting or Owning a Home
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Take a look at Example 2 on page 231
6.2 Renting or Owning a Home
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Rick Cassell rented an apartment for one year and paid $625 monthly rent. His other apartment-related costs for the year were: security deposit of $625; insurance, $85; utilities, $1,210; replacement of lost mailbox key, $10. What was the cost of renting the apartment for the one year?
6.2 Renting or Owning a Home
12 x $625 = $7,500 Cost for year’s rent
$625 Security Deposit
$85 Insurance
$1,210 Utilities
$10 Replacement Key
$9,430 Total 1st Year Cost
Add the Expenses
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Terrell Pryor’s monthly rent on a house he is leasing is $1,250. The security deposit is one month’s rent. Terrell is responsible for mowing the lawn and clearing the snow and estimates he will spend $100 a month to have this done. His other annual costs include $136 for insurance and $1,700 for utilities. What will be his first-years costs of renting this home?
6.2 Renting or Owning a Home
Add the Expenses
12 x $1,250 = $15,000 Cost for year’s rent
12 x $100 = $1,200 Mowing and Plowing
$85 Insurance
$1,210 Utilities
$10 Replacement Key
$9,430 Total 1st Year Cost
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COMPARING RENTING & OWNING HOMES
Whether you buy or rent a property, some expenses are similar, such as insurance and utilities. Some expenses are different, such as taxes and loss of income.
6.2 Renting or Owning a Home
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Look at Example 3 on page 232
$12,930 - $9,959 = $2,971
Buying is $2,971 less expensive than Renting
6.2 Renting or Owning a Home
Net Cost of Home Ownership
- $5,184 Interest
- $1,720 Property Taxes
- $3,270 Other Costs
- $680 Loss of Income
+ $895 Saving on Income Tax
$9,959 Cost of Home
Net Cost of Home Ownership
12 x - $850 = - $10,200
Annual Rent
- $1,200 Security Deposit
- $130 Insurance
- $1,400 Utilities
$12,930 Cost of Renting
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Look at CYU E on page 232
$10,986- $10,885= $101
Renting is $101 less expensive than Buying
6.2 Renting or Owning a Home
Net Cost of Home Ownership
- $9,100 Int, Tax, Ins, Maint.
- $2,926 Depreciation
- $560 Loss of Income
+ $1,600 Saving on Income Tax
- $10,986 Cost of Home
Net Cost of Home Ownership
12 x -$785 = -$9,420
Annual Rent
- $115 Insurance
- $1,150 Utilities
- $ 200 Security Deposit
$10,885 Cost of Renting
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Look at CYU F on page 233
$12,930 - $9,959 = $2,971
Buying is $2,971 less expensive than Renting
6.2 Renting or Owning a Home
Net Cost of Home Ownership
$276 Insurance
- $980 Utilities
- $4,060 Annual Int
- $240 Lot Rent
$9,959 Cost of Home
Net Cost of Home Ownership
12 x - $510 = - $6,120
Annual Rent
- $1,200 Security Deposit
- $130 Insurance
- $1,400 Utilities
$12,930 Cost of Renting
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Homework Page 233 – 234
# 9 – 13 Make sure you have charts for all the problems as
shown in the previous examples.
Ex.
6.2 Renting or Owning a Home
Net Cost of Home Ownership
$276 Insurance
- $980 Utilities
- $4,060 Annual Int
- $240 Lot Rent
$9,959 Cost of Home
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Goals Calculate the decimal tax rate Calculate property taxes for tax rates per $100 or
$1,000 Calculate property taxes for tax rates in mills or cents
per $1
6.3 Property Taxes
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DECIMAL TAX RATEProperty taxes are taxes on the value of real
estate such as homes, business property, or farm land.
Taxes are collected annually or semiannually by the tax departments of local tax districts such as cities or townships where the property is located.
The amount of property tax paid is based on the assessed value of a property.
6.3 Property Taxes
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Assessed values are generally less than their market values.
Local tax districts then determine the decimal tax rate, which is the tax rate at which the property is to be taxed.
Decimal Tax Rate =
6.3 Property Taxes
Total Property Tax Income Needed (to cover expenses)
Total Assessed Value (of all properties in the district)
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The Columbia School District’s total budgeted expenses last year were $6,000,000. Estimated income from other sources was $1,800,000. The total assessed value of all taxable property in Columbia last year was $39,000,000. Find the decimal tax rate needed to meet expenses.
6.3 Property Taxes
Decimal Tax Rate =Tax Income Needed ($) $6,000,000 – $1,800,000 = $4,200,000
Total Assessed Value $39,000,000
Decimal Tax Rate = 0.10769
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Elk County’s budget for a year is $6,750,000. Of that, $650,000 is raised from other income, and the rest from property taxes. The total assessed value of the county’s property is $80,000,000. What is the decimal tax rate, rounded to three decimal places.
6.3 Property Taxes
Decimal Tax Rate =Tax Income Needed ($) $6,750,000 – $650,000 = $6,100,000
Total Assessed Value $80,000,000
Decimal Tax Rate = 0.07625 = 0.076 (Rounded)
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The Happy Valley District must raise $1,950,000 from property taxes. The assessed value of property in the district is $48,200,000. What is the decimal tax rate needed, to four decimal places?
6.3 Property Taxes
Decimal Tax Rate =Tax Income Needed ($) $1,950,000
Total Assessed Value $48,200,000
Decimal Tax Rate = 0.040456 = 0.0405 (Rounded)
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TAX RATES per $1,000 of ASSESSED VALUE
The Watson’s property is valued at $120,000 and is assessed at 50% of its value. Calculate the property tax due on if their tax rate is stated as $62 per $1000.
$60,000 / $1,000 = 60 Number of $1,000 units in the Assessed Value
60 x $62 = $3,720 Property Tax Due
6.3 Property Taxes
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What tax must Art pay on his home, assessed for $67,500 if his tax rate is $50.08 per $1,000
$67,500 / $1,000 = 67.5 Number of $1,000 units in the Assessed Value
67.5 x $50.08 = $3,380.40 Property Tax Due
6.3 Property Taxes
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The Smiley family owns a cabin and land with an assessed value of $13,500. What property tax do they pay if the tax rate on the property
is $25.83 per $1,000?
$13,500 / $1,000 = 13.5 Number of $1,000 units in the Assessed Value
13.5 x $25.83= $348.71 Property Tax Due
6.3 Property Taxes
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TAX RATES in MILLSA mill is one tenth of a cent, or one thousandth
of a dollar. There are ten mills in one cent and 1,000 mills in one dollar.
Example:Calculate the tax due on the Watson’s property
($60,000 assessed value) if their tax rate is stated as 62 mills
62 mills / 1,000 = $0.062 (mills rate in $)$60,000 x $0.062 = $3,720
6.3 Property Taxes
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The city tax rate in Lakeview is 52 mills of the assessed value. Find the tax rate to be paid on property assessed at $38,400.
52 mills / 1000 = $0.052 (mills rate in $)
$38,400 x $0.052 = $1,996.80
6.3 Property Taxes
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What tax must Michelle Nolan pay on a condominium assessed at $32,100 if her tax rate is 38 mills?
38 mills / 1,000 = $0.038
$32,100 x $0.038 = $1,219.80
6.3 Property Taxes
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Homework Worksheet
From Workbook pg 81 – 82 #1 - 8
6.3 Property Taxes
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6.4 Property Insurance
Goals Calculate property insurance premiums for
homeowners Calculate property insurance premiums for renters Calculate how much can be collected on insurance
claims
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6.4 Property Insurance
PROPERTY OWNERS INSURANCE PREMIUMSA policy that covers your home and protects you
against other risks is called homeowners insurance.
Basic homeowners insurance covers Dwelling – your home Other Structures – such as garages Personal Property – contents of your home Additional Living Expenses – cost of living expenses Personal Liability – protection against lawsuits Medical Payments to Others – medical expenses for injury
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6.4 Property Insurance
Other Insurance Notes Off Premises insurance covers personal property when
you are away from home. For example, if the luggage and clothes you take on vacation
are stolen, their loss would be covered Usually about 10% of the amount of your policy
Replacement Cost Policies The Insurance Co. will pay the cost of replacing your
property at current prices Ex. If a $600 leather chair is destroyed in a fire, the
insurer will pay for a replacement even if it costs $900 now
Premiums are about 10%-15% higher than a standard policy
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6.4 Property Insurance
The money paid to an insurance company for property insurance is called the insurance premium.
Your premium will vary depending on Kind of coverage you buy How your house or apartment is built (Brick, Wood) Where it is located (Close to Fire Dept)
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6.4 Property Insurance
David Duval insured his house for $89,000 at an annual rate of $0.51 per $100. Find his Premium.
Solution:Find the number of $100 units in the insured amount
$89,000 / $100 = 890 units
Multiply the rate per $100 by number of units890 x $0.51 = $453.90
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6.4 Property Insurance
Vijay Singh insured his home for $61,000. Find the annual premium, to the nearest dollar, he will pay for a policy that costs $0.46 per $100.
$61,000 / $100 = 610 units
610 x $0.46 = $281
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6.4 Property Insurance
Chi Chi Rodriguez insures his home for $43,000. What annual premium will he pay if the policy cost is $0.74 per $100
43,000 / 100 = 430 units
430 x $0.74 = $318
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6.4 Property Insurance
RENTERS INSURANCE PREMIUMSA renters policy provides nearly the same
coverage as a homeowners policy except for loss of the dwelling and other structures.
Annual premiums for a renters policy are based on the amount of insurance on the contents of your apartment or rental home.
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6.4 Property Insurance
We will use the table below to calculate the renters policy rates.
Maximum Coverage of
Contents
Distance from Fire Station
Less than 5 miles
5 miles or more
$5,000 $120 $138
$10,000 $129 $148
$15,000 $140 $161
$20,000 $152 $175
$25,000 $165 $190
$30,000 $177 $204
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6.4 Property Insurance
Dottie Pepper rents an apartment that is 4.1 miles from a fire station. He insures its contents for $10,000. A computer system Dottie owns is also insured, but at an extra cost of $27 per year. What total annual premium will Dottie pay for this coverage?
Solution:Locate the premium on the chart. $129
Add the basic premium cost of additional insurance, if any. $129 + $27 = $156
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6.4 Property Insurance
Greg Norman wants to insure his apartment’s contents for $25,000. In addition, he decides to insure golf clubs appraised at $3,000 for an additional premium of $31. He lives one block from the fire station. Find his total premium for one year.
$165 + $31 = $196
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6.4 Property Insurance
Bobby Jones rents a home that is located 12 miles from the nearest fire station. He insures the home’s contents for $5,000. What annual premium will he pay?
$138
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6.4 Property Insurance
COLLECTING ON INSURANCE CLAIMSIf your property is damaged by fire or theft occurs,
you have to file a claim with your company.
The company will send an adjuster to look at the property and decide on the amount of loss.
Your basic policy usually contains a deductible. With a $100 deductible, you are responsible for the first $100 of your loss and the insurance company will pay for the rest.
The higher the deductible, the lower the premium
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6.4 Property Insurance
Your policy has a face value of $30,000 with a $1,000 deductible. How much will the insurance company pay if your loss is $7,800?
$7,800 - $1,000 = $6,800
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6.4 Property Insurance
How much will an insurance company pay for a loss of $10,200 if property is insured for $18,000 with a $250 deductible?
$10,200 - $250 = $9,950
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6.4 Property Insurance
Property insured for $70,000 with a $500 deductible suffers a loss of $82,000. How much will the insurance company pay?
$70,000 - $500 = $69,500
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Homework Page 247 – 248
# 14 - 25
6.4 Property Insurance
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6.5 Buying a Car
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6.6 Depreciating a Car
Goals Calculate average annual depreciation on a car Calculate the rate of depreciation
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6.6 Depreciating a Car
A car loses value as it grows older. This loss of value is called depreciation.
To find depreciation
Original Cost – Trade-in/Resale Value = Depreciation
When you buy a car, you can only estimate what the depreciation will be. The actual amount of depreciation will be known only when the car is sold or traded.
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6.6 Depreciating a Car
To calculate the estimated average annual depreciation on a car, follow these steps:1. Estimate the number of years the car will be kept2. Estimate the value of the car when it is resold or
traded in3. Subtract trade-in value from the original cost to
estimate total depreciation4. Divide the total depreciation by the number of years
the car will be kept.
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6.6 Depreciating a Car
John Smiley bought a car for $14,800. He estimates its trade-in value will be $5,800 at the end of 4 years. Find the estimated total and the estimated average annual depreciation of the car.
Estimated total depreciationOriginal Cost - Trade-in Value = Total Depreciation
$14,800 - $5,800 = $9,000
Estimated average annual depreciationTotal Depreciation ÷ Years = Est. Ave. Annual Dep.
$9,000 ÷ 4 = $2,250
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6.6 Depreciating a Car
Bob Walk bought a new care for $19,500. He has been told that his car will probably be worth $9,800 at the end of two years. What will be his estimated total and average annual depreciation for two years
Estimated total depreciationOriginal Cost - Trade-in Value = Total Depreciation
$19,500 - $9,800 = $9,700
Estimated average annual depreciationTotal Depreciation ÷ Years = Est. Ave. Annual Dep.
$9,700 ÷ 2 = $4,850
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6.6 Depreciating a Car
Jose Lind bought a car 9 years ago for $14,130. She sold it recently for $1,800. What was the total and average annual depreciation on the car?
Estimated total depreciationOriginal Cost - Trade-in Value = Total Depreciation
$14,130 - $1,800 = $12,330
Estimated average annual depreciationTotal Depreciation ÷ Years = Est. Ave. Annual Dep.
$12,330 ÷ 9 = $1,370
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6.6 Depreciating a Car
When the straight-line method of finding depreciation is used, the average annual depreciation may be shown as a percent of the original cost. The percent is called rate of deprecation.
Rate of Depreciation = Ave. Annual Depreciation ÷ Original Cost
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6.6 Depreciating a Car
A $12,000 car is sold 3 years later for $6,960. What is the rate of depreciation?
First, Find the total depreciation $12,000 - $6,960 = $5,040
Next, Find the Ave. Annual Depreciation $5,040 ÷ 3 = $1,680
Ave Annual Depreciation ÷ Original Cost = Rate of depreciation $1,680 ÷ $12,000 = 0.14 or 14%
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6.6 Depreciating a Car
A new car that cost $23,000 is worth $16,100 a year later. What was the rate of depreciation for the one year.
First, Find the total depreciation $23,000 - $16,100 = $6,900
Next, Find the Ave. Annual Depreciation $6,900 ÷ 1= $6,900
Ave Annual Depreciation ÷ Original Cost = Rate of depreciation $6,900 ÷ $23,000 = 0.3 or 30%
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6.6 Depreciating a Car
Orlando Merced sold his car for $368. He paid $9,200 for the car when he bought it 12 years ago. What was the annual rate of depreciation?
First, Find the total depreciation $9,200 - $368 = $8,832
Next, Find the Ave. Annual Depreciation $8,832 ÷ 12 = $736
Ave Annual Depreciation ÷ Original Cost = Rate of depreciation $736 ÷ $9,200 = 0.08 or 8%
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6.6 Depreciating a Car
Homework Workbook pg 86 #1-5