Effective Cost of a Loan: Your business is doing well but you have ambitions to

Question

Effective Cost of a Loan:

Your business is doing well but you have ambitions to make it exceptional. In order for your dreams to come true you will need to borrow $5 million dollars.

You seek the following terms:

·         Annual interest 9.5%, a 2 ½ year term,

·         All interest and principle payments deferred to the end of the 2 ½ year term of the loan

·         Front-end costs $50,000.

Your criteria are based on what you determined to be your maximum effective cost.

Using the information provided, determine the effective cost AND whether your project maximums are acceptable.

Note: deferred payments compound over the life of this loan on a monthly basis.

**PLEASE SHOW AND LIST ALL STEPS TO SOLUTION, THANK-YOU!!**

Explanation / Answer

ffective cost =

               amount paid in interest and fees / average principal amount outstanding

          average principal amount outstanding =

              sum of principal amounts outstanding/ number of payments

Here average principal amount outstanding=5000000/50,000=100

              ffective cost =1,334,448.42/100=$13344.4842

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