Jasper is looking to purchase a new home for $250,000. He is paying $50,000 as a down payment on the home and financing the remaining $200,000 with a loan secured by the home. He has the option of (1) paying no discount points on the loan and paying interest at 6.5 percent or (2) paying one discount point on the loan and paying interest of 5.5 percent on the loan. Both options require Jasper to make interest-only payments for the first five years of the loan and to pay the loan principal over the 25 years after that (it is a 30-year loan). Jasper itemizes deductions irrespective of any interest expense he may pay. Jasper's marginal ordinary income tax rate is 32 percent. What is Jasper's break-even point in years? (For simplicity, ignore time value of money concerns.)
What will be an ideal response?
One year.
See computation below:
| Description | Amounts | Calculation | |||
| (1) | Initial cash outflow from paying 1 point | $ | (2,000 | ) | $200,000 × 1% |
| (2) | Tax benefit from deducting points | +640 | (1) × 32% | ||
| (3) | After-tax cost of points | $ | (1,360 | ) | (1) + (2) |
| (4) | Before-tax savings per year from 5.5 percent versus 6.5 percent interest rate | $ | 2,000 | [$200,000 × (6.5% - 5.5%)] | |
| (5) | Forgone tax benefit per year of higher interest rate | (640 | ) | (4) × 32% | |
| (6) | After-tax savings per year of 6.5 percent versus 5.5 percent interest rate | $ | 1,360 | (4) + (5) | |
| Break-even point in years | 1 year | (3)/(6) | |||
You might also like to view...
The stock market approach to estimate brand equity involves determining the financial value of the company through stock valuation with an estimate of the portion of the value allocated to brand equity and not physical assets
Indicate whether the statement is true or false
Tanya wants to take the day off. She has no earned time and would, therefore, need to take the day without pay. Tanya is willing to do this
Her supervisor must determine whether granting such a request would be fair to other employees. Of the seven elements of a successful negotiation, this is an example of exploring options. Indicate whether the statement is true or false.
When considering which media vehicle to use, a brand should also consider that the media's ____________________ represents the brand.
a. Ownership b. Editorial climate c. Reach d. News
The Occupational Safety and Health Act makes it illegal to fire an employee in retaliation for filing a
a. multi state tort claims. b. safety complaint. c. discriminatory discharge suit. d. defamation suit.