Antonio would like to replace his golf clubs with a custom measured set. A local sporting goods megastore is advertising custom clubs for $630, including a new bag. In-store financing is available at 3.64 percent or he can choose not to renew his $600 certificate of deposit (CD), which just matured. The advertised CD renewal rate is 4.45 percent. Antonio knows the in-store financing costs would not affect his taxes, but he knows he'll pay taxes (25 percent federal and 5.75 percent state) on the CD interest earnings. Should he cash the CD or use the in-store financing? Why?
The after-tax CD earnings rate is %
Total of federal and state taxes are 0.25 + 0.0575 = 0.3075
CD renewal rate and the marginal tax rate = 0.0445 x (1 - 0.3075) = 0.03081625 or 3.08 %
The after-tax CD earnings rate is 3.08%.
Antonio should cash the CD to purchase the new custom clubs because his after-tax CD earnings rate is 3.08%, whereas the in-store financing rate is higher at 3.64%.
Antonio would like to replace his golf clubs with a custom measured set. A local sporting...
Antonio would like to replace his golf clubs with a custom measured set. A local sporting goods megastore is advertising custom clubs for $570, including a new bag. In-store financing is available at 3.52 percent or he can choose not to renew his $600 certificate of deposit (CD), which just matured. The advertised CD renewal rate is 3.42 percent. Antonio knows the in-store financing costs would not affect his taxes, but he knows he'll pay taxes (25 percent federal and...