Consider this case: Minuteman Cafe Inc. needs to take out a one-year bank loan o
ID: 2799387 • Letter: C
Question
Consider this case: Minuteman Cafe Inc. needs to take out a one-year bank loan of $550,000 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? (Hint: Remember that November has 30 days.) Value Simple interest monthly payment Add-on interest monthly payment v Choose the answer that best evaluates the following statement: Keedsler Motors 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. O The company needs to be sensitive to interest rate diferences 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 loansExplanation / Answer
Minuteman cafe Inc needs to take out bank loan of $550,000 for one year. It has been offered loan terms by 2 banks.
1. One Bank has offered a simple interest loan at 10% which requires monthly payment. The loan principle will be paid back at the end of the year.
Now interest payable for November month at simple rate of interest at 10% = 550000*10/100*30/360 assuming 30 days a month for November and total 360 days per year.
Monthly interest payable = $ 4583.33
Annual Interst = $55000
Totoal loan payment = interst + principle = $610,000
2. Another Bank has offered 7% add on interest payable in 12 equal monthly installments.
Now with 7% add on rate and with principle of 550,000 , monhtly EMI works out to be $ 47590.
For month of November which is second last month of repayment. total EMI payable is $ 47590 inclusive of monthly interest of $ 550.
As per the given statement pertaining to Keedsler Motors Inc, first answer best evaluates the statement. As company should always be senstive to interest rate differene between various loan types and it should consider the option which minimizes the effective borrowing cost for the period under consideration for availing the loan. Detailed analysis for both simple and add on type of interest rate should be done to determine total obligation of payment under both options.