PFIN 2nd Edition by Lawrence Gitman ,Michael Joehnk,Randall Billingsley

Exercise 6

Use Worksheet 7.2. Julia Fernandez wants to buy a home entertainment center. Complete with a big-screen TV, DVD, and sound system, the unit would cost $4,500. Julia has over $15,000 in a money fund, so she can easily afford to pay cash for the whole thing (the fund is currently paying 5% interest, and Julia expects that yield to hold for the foreseeable future). To stimulate sales, the dealer is offering to finance the full cost of the unit with a 36-month installment loan at 4%, simple. Julia wants to know: Should she pay cash for the home entertainment center or buy it on time? ( Note: Assume Julia is in the 28% tax bracket and that she itemizes deductions on her tax returns.) Briefly explain.