Consider this case: Mildred\'s Brewing Corp. needs to take out a one-year bank l
ID: 1171542 • Letter: C
Question
Consider this case: Mildred's Brewing Corp. needs to take out a one-year bank loan of $450,000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of 896 that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 5% 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: Fitcom 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. 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.Explanation / Answer
loan amount , L = $450,000
period of loan , n = 1 year
days in november , d = 30
no. of days in 1 year , t = 360
1) simple interest monthly payment = L*(d/t)*interest rate = 450,000*(30/360)*0.08 = $3000
2) add-on interest monthly payment
total interest = add-on interest rate*L*period of loan = 0.05*450,000*1 = 22,500
monthly interest payment , m1= total interest*(d/t) = 22,500*(30/360) = $1875
monthly principal payment, m2 = L*(d/t) = 450,000*(30/360) = 37,500
add-on interest monthly payment = m1+m2 = 1875+37500 = $39,375
the correct choice for Fitcom Corp is the 1st option, that is , it should only accept add-on interest loans when it cannot get simple interest loans, since the main concern for the company is the amount of monthly payment, which will always be greater in case of an add-on interest loan