As a start-up business, Phil is needs funding to start the business. A \"friend\

Question

As a start-up business, Phil is needs funding to start the business. A "friend" agreed to lend him $10,000 for one year if he agree to repay $1,000 interest plus return the $10,000 investment. A second "friend," has only $5,000 to lend, but wants total funds of $5,400 in repayment at the end of one year. HINT: Identify the best source for funding part of Pedal Pushers working capital needs and defend your answer. Calculate the annual interest rate 6. Which loan would you choose and explain why? Show the math to support your answer. ( points) I will choose the $10,000 because it's large amount and I will have the ability to invest more money more

Explanation / Answer

The interest on Friend A's loan is 1000/10000 = 10%
The interest on Friend B's loan is 400/5000 = 8%

There are a few things to consider here:
If Phil takes up Friend B's proposal and the actual working capital requirement is $10,000, Phil needs to have a plan on how he will procure the remaining cash. If the rest of the $5,000 is available for a higher interest rate than the loan provided by friend B, Phil can consider it as long as the total interest is less than $1,000 (the interest on Friend A's loan). So, on the rest of the $5,000, Phil should accept an interest rate of no more tha 12% ($600). If the interest rate is higher than this, Phil should take up the offer provided by Friend A.

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