Consider this case: Chez Quis Inc. needs to take out a one-year bank loan of $50
ID: 2729430 • Letter: C
Question
Consider this case: Chez Quis Inc. needs to take out a one-year bank loan of $500, 000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of 8% 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? Choose the answer that best evaluates the following statement: InputOutzone Inc. 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 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. The company should only accept add-on interest loans when it cannot get simple interest loans.Explanation / Answer
If the interest is 8% simple interest Interest on the loan of $500000= 40000 Monthly repayment= ((500000+40000)*30)/360 45000 The monthly payment is based on 360 days a year and irrespective of the days in the month Hence, in November the repayment $45000 If the interest is 5% add on for a year hence, the interest per month= 5%/12= 0.42% Assuming the $500000 will be paid in equal instalments Each instalment = 500000/12= 41,666.67 Hence, monthly interest will be as follows: Month Prinicipal Outstanding Interest= 0.42% Principal repaid Interest repaid Total amount repaid Jan 5,00,000.00 2,100.00 41,666.67 2,100.00 43,766.67 Feb 4,58,333.33 1,925.00 41,666.67 1,925.00 43,591.67 Mar 4,16,666.67 1,750.00 41,666.67 1,750.00 43,416.67 Apr 3,75,000.00 1,575.00 41,666.67 1,575.00 43,241.67 May 3,33,333.33 1,400.00 41,666.67 1,400.00 43,066.67 Jun 2,91,666.67 1,225.00 41,666.67 1,225.00 42,891.67 Jul 2,50,000.00 1,050.00 41,666.67 1,050.00 42,716.67 Aug 2,08,333.33 875.00 41,666.67 875.00 42,541.67 Sep 1,66,666.67 700.00 41,666.67 700.00 42,366.67 Oct 1,25,000.00 525.00 41,666.67 525.00 42,191.67 Nov 83,333.33 350.00 41,666.67 350.00 42,016.67 Dec 41,666.67 175.00 41,666.67 175.00 41,841.67 Hence, the amount to be repaid in Nov= 42,016.67 The company should accept add on interest loans when it cannot get simple interest loans