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 Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money...

 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 25​% income tax bracket. She can either borrow the money at an interest rate of 4​% from the motorcycle​ dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 6​%. 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?

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jeff jeffy answered 10 months ago
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