Use Worksheet $7\mathrm{.}2.$ Robin Waller wants to buy a home entertainment center. Complete with a big$-$screen TV and sound system, the unit would cost $$4,000.$ Robin has over $$18,000$ in a money fund, so she can easily afford to pay cash for the whole thing $($the fund is currently paying $6$ percent interest, and Robin 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 $6$ percent.

Robin wants to know whether she should pay cash for the home entertainment center or buy it on time. $($Note: While Robin is in the $32$ percent tax bracket, she does not itemize deductions on her tax returns.$)$

Round your answers to the nearest cent.

BUY ON TIME OR PAY CASH

Cost of Borrowing

$1$ Terms of the loan

a$.$ Amount of the loan $

b$.$ Length of the loan $($in years$)4$

c$.$ Monthly payment $

$2$ Total loan payments made $

$($monthly loan payment $\backslash$times length of loan in months$)$

$3$ Less: Principal amount of the loan $

$4$ Total interest paid over life of loan $

$5$ Tax considerations:

a$.$ Is this a home equity loan $($where interest expenses can be deducted from taxes$)?$

NO

b$.$ Do you itemize deductions on your federal tax returns? NO

c$.$ If you answered yes to BOTH questions, then proceed to line $6$; if you answered no to either one or both of the questions, then proceed to line $8$ and use line $4$ as the after$-$tax interest cost of the loan.

$6$ What federal tax bracket are you in$?$

$($use either $10,12,22,24,32,35,$ or $37\%)32\%$

$7$ Taxes saved due to interest deductions

$($line $4\backslash$times tax rate $,$ from line $6)$ $ $-----$

$8$ Total after$-$tax interest cost on the loan $

Cost of Paying Cash

$9$ Annual interest earned on savings $($annual rate of interest

earned on savings $\backslash$times amount of loan$)$ $

$10$ Annual after$-$tax interest earnings $

$11$ Total after$-$tax interest earnings over life of loan $

Net Cost of Borrowing

$12$ Difference in cost of borrowing vs$.$ cost of paying cash $

Should she pay cash for the home entertainment center or borrow from the store?

$-$Select$-$