Problem
Antonio would like to replace his golf clubs with a custom-measured set. A local sporting goods megastore is advertising custom clubs for $670, including a new bag. In-store financing is available at 4.77 percent, or he can choose not to renew his $600 certificate of deposit (CD), which just matured. The advertised CD renewal rate is 4.88 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? How much is the after-tax CD earnings rate?