Enter your dollar answers rounded to the nearest two cents and precede numbers that are less than zero (0) with a minus sign (–).)Buy On Time or Pay CashCost of Borrowing 1.Terms of the loan a. Amount of the loan$10,000.00 b. Length of the loan (in years)5 c. Monthly payment$188.70 2.Total loan payments made ($ 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?35% 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 (6% 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 than you’ll pay on the loan. The interest on a loan will cost you more than the interest you would earn if you invested the principal.

It is the process of making decisions that involve the management of costs in order to achieve…

Answered: Buy On Time or Pay Cash Cost of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

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Enter your dollar answers rounded to the nearest two cents and precede numbers that are less than 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	$10,000.00
	b. Length of the loan (in years)	5
	c. Monthly payment	$188.70
2.	Total loan payments made
	($ 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?	35%
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
	(6% 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 than you’ll pay on the loan. The interest on a loan will cost you more than the interest you would earn if you invested the principal.

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Buy On Time or Pay Cash Cost of Borrowing 1. Terms of the loan a. Amount of the loan $10,000.00 b. Length of the loan (in years) 5 c. Monthly payment $188.70