A company needs to borrow $200,000 for 6 years. Barring any
cash flow constraints (i.e. the firm might find it easier to budget
monthly payments as opposed to semi annual payments), which
of the following two possible sources is the best option for the
firm?
1.
One source will lend them money at a rate of 16% compounded
monthly if the loan is paid by monthly payments.
2.
A second source will lend the money with semi-annual payments at
a rate of 18% compounded annually.
1. P=$200,000
t= 6 years
rate= 16% compounded monthly
A= P(1+r/n)^(nt)
A= 200000(1+0.16/12)^(12*6)= $519,036.23
total interest payable= $519,036.23-$200,000=$319,036.23
2. P= $200,000
t= 6 years
rate = 18% compounded annually
A= P(1+r/n)^(nt)
A=200000(1+0.18)^6 = $539,910.83
interest payable= $539,910.83-$200,000=$339,910.83
the option 1 is best for the firm as it's payable interest is much less than the 2nd option,
the monthly payment is much less than the semi annual payment of 2nd option.
A company needs to borrow $200,000 for 6 years. Barring any cash flow constraints (i.e. the...
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