Your company wishes to borrow $800,000 for 90 days in order to make a large purc

Question

Your company wishes to borrow $800,000 for 90 days in order to make a large purchase of some equipment. The manufacturer of the equipment is giving you a good deal and you think this purchase will help your business grow in the future. You do not have this cash on hand and must borrow it. The bank you use offers to loan to you the money at 10.5% ordinary interest. •What is the amount of interest on this loan? Because you are a customer at the bank, you ask if they could lend you the money at 10.5% exact interest. •Using exact interest, what is the amount of interest on this loan? You have been making your payments on the loan, and after 60 days make a big sale that gives you $25,000 cash. You are deciding between making an extra payment on your loan using the $25,000 cash or purchasing some additional materials you need for your business. If you purchase the additional materials today, you will receive 15% off the usual cost of these items. (Assume that the interest of the loan is 10.5% using exact interest.) •How much interest will you save on this loan if you make the partial payment and do not purchase the additional materials? •How much will you save by purchasing the discounted materials and not making the partial payment? •What choice do you make? •What additional factors might you consider when making your decision?

Explanation / Answer

Details Amt $ Amount of Loan                800,000 Ordinary Interest rate 10.50% Ordinary Interest amount= =800,000*10.50/100*90/360                                                     = $              21,000 So Ordinary Interest amount is $              21,000 Exact Interest amount is =800,000*10.50/100*90/365                                                             =                   20,712 So Exact interest amount is = $              20,712 Laon repayment amount =                   25,000 Days due for loan                           30 exact loan interest @ 10.5% =25000*10.5/100*30/365 Exact loan interest saved on repayment of $ 25000 $                    216 If Materials purchased, 15% discount will be given If ordinary purchase cost =x Discounted cost =0.85x =25000 x =29411.76 So original purchase cost of material $              29,412 Discount Amount = $                 4,412 As the discount on material is more than the interest saved , I shall choose to purchase material Additional factors like cost of caarying material in inventory and current credit available for purchase etc are to be considered to get the actual saving on the purchase

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