5% MINDTAP Assignment 15-Working Capital Management Due Tomorrow at 11 PM EST 11

Question

5% MINDTAP Assignment 15-Working Capital Management Due Tomorrow at 11 PM EST 11. Bank loans Aa Aa Short-term financing through bank loans Consider this case: Mildred's Brewing Corp. needs to take out a one-year bank loan of $550,000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of 12% that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 9% add-on interest to be repaid in equal monthly installments. Based on a 360-day year, what will be the monthly payment for each loan for November? (Hint: Remember that November has 30 days.) Value Simple interest monthly payment Add-on interest monthly payment Choose the answer that best evaluates the following statement Tull Cybermatic Corp, always prefers simple interest loans over add-on interest loans because even if the interest rate is higher on the simple interest loan, its monthly payment is lower The company should only accept add-on interest loans when it cannot get simple interest loans. O The company needs to be sensitive to interest rate differences between loan types and take them into consideration when deciding what type of loan to take out. Type here to search

Explanation / Answer

Ans. Calculation of Monthly payment under simple interest payment method

Rate of Interest is 12% and Monthly ROI is 1%

Monthly Interest payment is = $550000X1% =$5500

as per question Entire principal payment to be made at the end of year

Calculation of Monthly payment of under Add on Interest payment method

Loan amt $550000

ROI 9%, monthly ROI (9/12) = .75%

Montlhy Payment is = $550000/(1+.0075)12 =$550000/11.4349 = $48098

Monthly Payment under simple interest is $5500 (only interest part)

Add on interest method is $48098

Total interest expenses under Simple interest method ($5500X12) =$66000

Total Interest expenses under Add on interest method (48098X12)-$550000= $27176

Company should accept Add on interest method because it provide lower interest payment as compair of Simple interest payment method.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.