Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the$25,000 purchase price of the bike. She is in the 33% income tax bracket. She can either borrow the money atan interest rate of 7% from the motorcycle dealer, or she could take out a second mortgage on her home. Thatmortgage would come with an interest rate of 9%.Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan fromthe motorcycle dealer could not be deducted on Bella's federal tax return.a.Calculate the after-tax cost of borrowing from the motorcycle dealership.b. Calculate the after-tax cost of borrowing through a second mortgage on Bella's home.C.Which source of borrowing is less costly for Bella?d.Should Bella consider any other factors when deciding which loan to take out?

When money is borrowed than there is interest to be paid on that but interest payments are tax…

Answered: Bella Wans is interested in buying a…

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter11: Investor Losses

Section: Chapter Questions

Problem 3RP

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Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $20,000 purchase price of the bike. She is in the 32% income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 8%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on Bella's federal tax return. a. Calculate the after-tax cost of borrowing from the motorcycle dealership. b. Calculate the after-tax cost of borrowing through a second mortgage on Bella's home. c. Which source of borrowing is less costly for Bella? d. Should Bella consider any other factors when deciding which loan to take out?
To finance his purchase of his new car, Sean must make a 10% down payment and pay all taxes up front. If the car has a sales price of $25,000 and state sales tax rate of 7%, how much money must Sean pay for the car up front?
Anita and Jim are considering a home equity loan to build a nice deck and patio in their back yard. They want to borrow $35,000 and are quoted an APR of 10%. If their marginal tax bracket is 24%, how much money can they save in taxes each year if capitalize on the tax-deductibility of interest paid on the home equity loan?
Tori is planning to buy a car. The maximum payment she can make is $3400 per year, and she can get a car loan at her credit union for 7.3% interest. Assume her payments will be made at the end of each year 1–4. If Tori’s old car can be traded in for $3325, which is her down payment, what is the most expensive car she can purchase?
You will need a calculator for this problem. Sanchez earns $4,000, and she wants to save it for retirement, which is 10 years away. She can either save it in a taxable account or put it into a Roth IRA. Suppose that Sanchez can receive an annual rate of return of 8 percent and her marginal tax rate is 25 percent. By the time she reaches retirement, how much money would she have in either option? [Note: Sanchez has to pay tax on the $4,000, so she cannot put the full amount either into the taxable account or the Roth IRA.]
Laura wants to buy a delivery truck. The truck costs $76,000 , and will allow her to increase her after tax profits by $14,000 per year for the next 10 years. She will borrow 82% of the cost of the truck for 10 years, at an interest rate of 6%. Laura’s unlevered cost of capital is 17% and her tax rate is 21%. The loan includes a $2,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
Jane wants to buy a brand new Toyota Corolla, model year 2021. Today's out-of-the- door cost of the car is $23,452.95 including all taxes and fees. For her bank loan to be approved, she had to make a 12% down-payment and finance the rest over a 5 year period at the simple interest rate of 6% per year due to her fair credit standing. What is her monthly payment? Draw the CFD
Joan has a choice of purchasing a car for $20,000 with 9.7% interest cost to borrow and a 3 year repayment period with monthly payment. Leasing the auto would cost $300 a month for a 3 year term. The sales tax is 6%. The car is expected to have a value of $14,000 at the end of the leasing period. Joan can obtain 7% after tax on similar marketable investments. Should she lease or buy the car?
You own a home and are thinking of doing some home repairs. This year there is a tax credit of one-fifth the cost of materials for adding insulation and for replacing windows and external doors, up to a $4,000 tax credit maximum. a. You decide to add insulation to your attic which costs $2,800 in materials, and you install it yourself. What is the dollar amount of the tax credit? Tax credit $
b) that his monthly house and property tax payment should not exceed 35% of his disposable monthly income. After researching the market, he determines he can obtain a 30-year home loan for 6.95% annual interest per year, compounded monthly. His monthly property tax payment will be approximately $150. What is the maximum amount he can pay for a house if his disposable monthly income is $2000? A person wants to buy a home. He has been advised A worker borrow $3500 for one year from a friend at an interest rate of 1.5% per month instead of taking a loan from a bank at a rate of 18% per year. Compare how much money the worker will save or lose on the transaction. An instrument can be bought for $10,000 cash or for d) $2000 down and payments of $750 per year for 15 years. What is the annual interest rate for the time payments? (Hint: you can assume interest rate between 4 and 5 % )
Rachel purchased a car for $17,500 three years ago using a 4-year loan with an interest rate of 10.8 percent. She has decided that she would sell the car now, if she could get a price that would pay off the balance of her loan. What is the minimum price Rachel would need to receive for her car? Calculate her monthly payments, then use those payments and the remaining time left to compute the present value (called balance) of the remaining loan.
Rex is planning to buy a house. His gross income is $72000 and his net income is $60000. He saved $30000 for the downpayment. The monthly expenses are $250 for property taxes and $150 for heat. His bank uses the GDSR maximum approval ratio of $32%. The approval interest rate on a 5-year term will be 4.64%. Calculate the mortgage payment that he can afford on the new house.

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