DE CID IN G W H E TH E R TO P AY CASH O R FIN AN CE A P URCH ASE. Use Worksheet 7.2. Alice Morgan wants to buy a home entertainment center. Complete with a big-screen TV, DVD, and sound system, the unit would cost $4,500.

Alice has over $15,000 in a money market fund, so she can easily afford to pay cash for the whole thing (the fund is currently paying 5 percent interest, and Alice 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, simple interest installment loan at 4 percent. Alice wants to know whether she should pay cash for the home entertainment center or buy it on time. (Note: Alice is in the 28 percent tax bracket and she itemizes deductions on her tax returns.) Briefly explain. LO1