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
28?% federal income tax bracket. She can either borrow the money at an interest rate of 7?% 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. Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the? motorcycle?