Personal Financial Planning 13th Edition by Lawrence Gitman,Michael Joehnk,Randy Billingsley

Exercise 30

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 5 percent, simple. Constance wants to know: Should she pay cash for this home entertainment center or buy it on time ( Note: Assume Constance 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 Constance 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 Constance should pay cash or buy on time. Does your answer change from the one you came up with in part (a) Explain.
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