PFIN 3rd Edition by Lawrence Gitman,Michael Joehnk,Randall Billingsley

Exercise 8

Use Worksheet 7.2. Constance Botin wants to buy a home entertainment center. Complete with a big-screen TV, DVD, and sound system, the unit would cost $4,500. Constance 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 percent interest, and Constance 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 percent, simple. Constance wants to know: Should she pay cash for the home entertainment center or buy it on time? ( Note: Assume that Constance is in the 28 percent tax bracket and that she itemizes deductions on her tax returns.) Briefly explain.
REFERENCE WORKSHEET 7.2: