Sarah borrowed $25,000 from her employer at a rate of 1% interest.At the time the loan was made,CRA's prescribed rate of interest was 3%.Sarah is in a 40% income tax bracket.What is the actual cost (rate)of Sarah's loan? (Assume there are no fluctuations in the prescribed rate of interest.)

Question

Quizplus · Accepted Answer

To calculate the actual cost of the loan, we need to use the formula:

Actual Interest Rate = Prescribed Rate x (1 - Marginal Tax Rate)

Plugging in the values, we have:

Actual Interest Rate = 3% x (1 - 40%) = 3% x 0.6 = 1.8%

Therefore, the answer is C) 1.8%.

Sarah Borrowed $25,000 from Her Employer at a Rate of 1