Answered

Westonci.ca is your trusted source for finding answers to all your questions. Ask, explore, and learn with our expert community. Get quick and reliable answers to your questions from a dedicated community of professionals on our platform. Join our platform to connect with experts ready to provide precise answers to your questions in different areas.

Wizard Corp. 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 10% that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 7% 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?
Value
Simple interest monthly payment 58,850.00
Add-on interest monthly payment 48,150.00
42,800.00
53,500.00
Choose the answer that best evaluates the following statement:
A bank loan officer has been approached by a start-up company that needs a five-year loan to purchase the equipment for its first project. The project will have a life of five years. At the end of five years, the equipment will be worthless. The founders of the company told the loan officer that they would be willing to pay a much higher interest rate on a simple interest loan rather than contracting to an add-on interest loan.
A. The loan officer should offer the company an add-on interest loan because there is a high risk that the company will not be able to repay the principal on the loan at the end of the project's life.
B. The loan officer should offer the company a simple interest loan. The bank will make more money in the long run, because it can charge a much higher interest rate.

Sagot :

Answer: a. $53500

b. A. The loan officer should offer the company an add-on interest loan because there is a high risk that the company will not be able to repay the principal on the loan at the end of the project's life.

Explanation:

a. Based on a 360-day year, the monthly payment for each loan for November will be:

Principal = $600,000

Interest rate = 10%

Simple interest = (P×R×T)/100

= (600000 × 10× 1) /100

= $60000

The simple interest per month which will also be thesame for Novemeber will be:

= 60000/12

= $5000

Since add on interest is 7%, then the interest will be:

= 7% × $600,000

= 0.07 × $600,000

= $42000

Therefore, the interest for month of November will be:

=(600000 +42000)/12

= $642000 / 12

= $53500

b. The answer that best evaluates the statement given is option B. It should be noted that since it's a startup company, there may be challenges in repaying the loan. Therefore, the best scenario will be that the loan should be given on add on interest basis.

We appreciate your visit. Our platform is always here to offer accurate and reliable answers. Return anytime. We hope our answers were useful. Return anytime for more information and answers to any other questions you have. Your questions are important to us at Westonci.ca. Visit again for expert answers and reliable information.