Elizabeth Erlich wants to buy a home entertainment center. Complete with a big-screen TV, DVD, and sound system, the unit would cost $4,500. Elizabeth 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 5 percent, simple. Elizabeth wants to know: Should she pay cash for this home entertainment center or buy it on time? (Note: Assume Elizabeth is in the 28 percent tax bracket and that she itemizes deductions on her tax returns.) Briefly explain your answer.
a. Should she pay cash for the entertainment center?
b. Rework the problem, assuming that Elizabeth has the option of using a 48-month, 6 percent home equity loan to finance the full cost of this entertainment center. Again, use Worksheet 7.2 to determine if Elizabeth should pay cash or buy on time. Does your answer change from the one you came up with in part (a)? Explain.