Question

Antonio would like to replace his golf clubs with a​ custom-measured set. A local sporting goods megastore is advertising custom clubs for ​$760​, including a new bag.​ In-store financing is available at 4.26 ​percent, or he can choose not to renew his ​$300 certificate of deposit​ (CD), which just matured. The advertised CD renewal rate is 4.86 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?

Answer 1

D rate is 6.13% before taxes.

Total tax percentage = 25% + 5.75% = 30.75%

After tax rate of CD = 6.13%(1 - .3075) = 4.25%

Since after tax rate of CD is less than 5.38%, he should cash in the CD to pay for the golf clubs rather than use the store financing.