Carol Is Considering the Purchase of a New Car

question 46

Essay

Carol is considering the purchase of a new car. She can obtain a car loan from the
dealership at a rate of 6.5%. Alternatively, she can take out a home equity loan and use
the proceeds to buy the car. The rate on the home equity loan is 9%. Interest payments
would be tax deductible on the home equity loan, but not on the loan from the
dealership. If Carol is in the 30% marginal tax bracket, which financing choice should
she make? (Assume the transaction costs associated with the two loans are similar in
size.)

---

Definitions:

Variable Overhead

Variable overhead consists of indirect production costs that vary with the level of output, such as utilities for manufacturing facilities.

Indirect Labor

The labor of employees who are not directly involved in the production process but support production through tasks such as maintenance and supervision.

Precision Drills

Tools or machines designed for drilling with exceptional accuracy and precision.

Variable Overhead

The indirect production costs that vary in total directly with changes in production volume or activity levels.