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You are headed to the mountains for some climbing this summer and you need some gear. The local mountaineering shop is offering 6% financing on all purchases before the end of the month
Your savings account is currently paying 5%, and you are in a marginal tax bracket of 28%. Which of the following is true?
A) Borrow from the mountain shop — it is cheaper.
B) Take the money out of savings — it is cheaper.
C) It does not matter where you get the money; it will cost the same.
D) You should seek competent financial help.
E) None of the above are true.

Respuesta :

jepessoa

Answer:

B) Take the money out of savings — it is cheaper.

Explanation:

The real interest you are receiving from your bank account = 5% x (1 - tax rate) = 5% x 72% = 3.6%

If you decide to finance your purchases, you will be paying a 6% interest rate while keeping your money on the bank only yields 3.6%, so you should pay the gear with cash.  

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