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3 April, 06:13

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?

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  1. 3 April, 07:00
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    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.
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