You are going to make a substantial purchase. You have enough money to pay cash, but...

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Finance

You are going to make a substantial purchase. You have enoughmoney to pay cash, but don’t know if that’s the way to make bestuse of your assets. Maybe you should take out an installment loanto make the purchase and invest the cash you would otherwise haveused to pay for it.
Use the information provided to complete the following worksheetand analyze how the numbers work out most favorably for you. Forsimplicity, compounding is ignored in calculating both the cost ofinterest and interest earnings. [Note: Enter your dollar answersrounded to the nearest two cents and precede numbers that are lessthan zero (0) with a minus sign (–).]
Buy On Time or Pay Cash
Cost of Borrowing
1. Terms of the loan
a. Amount of the loan $20,000
b. Length of the loan (in years) 6
c. Monthly payment $322.00
2. Total loan payments made
($ per month months) $
3. Less: Principal amount of the loan $
4. Total interest paid over life of loan $
5. Tax considerations:
– Is this a home equity loan? no
– Do you itemize deductions on your federal tax return? yes
6. What federal tax bracket are you in? 25%
7. Taxes saved due to interest deductions
($ x %) $
8. Total after-tax interest cost on the loan $
Cost of Paying Cash
9. Annual interest earned on savings
(2% x ) $
10. Annual after-tax interest earnings
($ x %) $
11. Total after-tax interest earnings over life of loan
($ x years) $
Net Cost of Borrowing
12. Difference in cost of borrowing versus cost of paying cash $
Based on the numbers alone, you should because:
If you invest the principal, you’ll earn more interest thanyou’ll pay on the loan.
The interest on a loan will cost you more than the interest youwould earn if you invested the principal.

Buy On Time or Pay Cash
Cost of Borrowing
1.	Terms of the loan
	a. Amount of the loan	$20,000
	b. Length of the loan (in years)	6
	c. Monthly payment	$322.00
2.	Total loan payments made
	($ per month months)		$
3.	Less: Principal amount of the loan		$
4.	Total interest paid over life of loan		$
5.	Tax considerations:
	– Is this a home equity loan?	no
	– Do you itemize deductions on your federal tax return?	yes
6.	What federal tax bracket are you in?	25%
7.	Taxes saved due to interest deductions
	($ x %)		$
8.	Total after-tax interest cost on the loan		$
Cost of Paying Cash
9.	Annual interest earned on savings
	(2% x )		$
10.	Annual after-tax interest earnings
	($ x %)		$
11.	Total after-tax interest earnings over life of loan
	($ x years)		$
Net Cost of Borrowing
12.	Difference in cost of borrowing versus cost of paying cash		$

Answer & Explanation Solved by verified expert

4.3 Ratings (933 Votes)

Calculating cost of borrowing Loan amount 20000 Length of Loan 6 years 6 x 12 72 months Monthly payment 322 Total loan payments made Monthly payment x length of loan in months 322 x 72 23184 Total interest paid over life of loan 23184 20000 3184 Tax saved due to interest deduction Federal tax bracket x total interest paid over loan 25 x 3184 796 Total after tax interest cost of loan Total interest paid over loan Tax saved See Answer

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Transcribed Image Text

You are going to make a substantial purchase. You have enoughmoney to pay cash, but don’t know if that’s the way to make bestuse of your assets. Maybe you should take out an installment loanto make the purchase and invest the cash you would otherwise haveused to pay for it.Use the information provided to complete the following worksheetand analyze how the numbers work out most favorably for you. Forsimplicity, compounding is ignored in calculating both the cost ofinterest and interest earnings. [Note: Enter your dollar answersrounded to the nearest two cents and precede numbers that are lessthan zero (0) with a minus sign (–).]Buy On Time or Pay CashCost of Borrowing1.Terms of the loana. Amount of the loan$20,000b. Length of the loan (in years)6c. Monthly payment$322.002.Total loan payments made($ per month months)$3.Less: Principal amount of the loan$4.Total interest paid over life of loan$5.Tax considerations:– Is this a home equity loan?no– Do you itemize deductions on your federal tax return?yes6.What federal tax bracket are you in?25%7.Taxes saved due to interest deductions($ x %)$8.Total after-tax interest cost on the loan$Cost of Paying Cash9.Annual interest earned on savings(2% x )$10.Annual after-tax interest earnings($ x %)$11.Total after-tax interest earnings over life of loan($ x years)$Net Cost of Borrowing12.Difference in cost of borrowing versus cost of paying cash$Based on the numbers alone, you should because:If you invest the principal, you’ll earn more interest thanyou’ll pay on the loan.The interest on a loan will cost you more than the interest youwould earn if you invested the principal.