Question

4

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Evaluating alternative notes A borrower has two alternatives for a loan: (1) issue a $240,000, 90-day, 8% note or (2) issue a $240,000, 90-day note that the creditor discounts at 8%. Assume a 360-day year. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. X Open spreadsheet a. Calculate the amount of the interest expense for each option. Round your answer to the nearest dollar for each alternative b. Determine the proceeds received by the borrower in each alternative. Round your answers to the nearest dollar (1) $240,000, 90-day, 8% interest-bearing note: $ (2) $240,000, 90-day note discounted at 8%: $ is more favorable to the borrower because the borrower c. Alternative receives more cash pays more interest has an extension of time to pay

Answer 1

Answer:

a)Interest expense for option 1 is 240000*8%*90/360= $4800

Under option 2 there is no interest payable on discounting=240000*8%*90/360= $4800

b. Under option 1Proceed from issue of note=Principal+ interest

=$240000+4800= $244800

Under option 2 Proceed from issue of note=Principal - interest

=$240000-$4800=$235,200

c) Compute the effective rate of interest
Particular	Option 1	Option 2
Interest expenses (a)	4,800	4,800
Proceeds from option(b)	2,40,000	2,35,200
Rate of interest per annum(a/b*360/90)	8%	8.16%
As the effctive rate of interest is lower with option -1
Thus, option -1 is more favorable.