Chapter 16 Bank loans Aa Aa Short-term financing through bank loans Consider thi
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Question
Chapter 16 Bank loans Aa Aa Short-term financing through bank loans Consider this case: Atlantic Northern Inc. needs to take out a one-year bank loan of $600,000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of i 2% 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 12 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: Industrialization Automation Co. needs to borrow $10,000,000. The compeny has been affered both simple interest loan. O The company needs to evaluate more factors than just the intorest rate before deciding which type of loan it should accept The company should accept the add-on interest loan, becouse it will be paying less money in interest due to the lower interest rate. O MacBook 30Explanation / Answer
Question - 1
In simple interest scheme, it was given that principle amount is paid at the end of the year. So what is paid as monthly installment shall be Interest only.
Simple interest monthly Installment = 600,000 * 12 % * 30 / 360 = 6000
In add on Interest scheme, interest on principle is computed at the beginning and added to principle to determine the montly installment.
Add on Interest monthly Installment = 600,000 * (1.09) / 12 = 54500
Question - 2
(a) ... Company need to evaluate more factors than just the interest rates before deciding which type of loan it should accept.
Even though we are paying back part of the loan every month, we are paying same interest on every month. Thus total cost of interest paid may be ( not necessarly) some times more than simple interest.
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