Question

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

  

January $ 10,100 April $ 10,100

February 4,100 May 11,100

March 5,100 June 6,100

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

  

January 5 % April 12 %

February 6 May 12

March 9 June 12

What long-term interest rate would represent a break-even point between using short-term financing and long-term financing? (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

Solution y Carmen's Beauty Salon Short-term financing Month Annual | Monthly Rate Rate Amount Financed 1 Monthly Interest January 1 $ 42.42 $ 20.50 February à = 0.75% 5.4. 0.42%. $ 10, 100 40.50% 4,100 March 5,100 April = 1.00 10,100 May the 1.00% 11,100 June | 12% 12.1.004.) 6,100 Total $ 46,600 $ 38.25 $ 101 $ 61 $ 374.17 S | Monthly Interest Amount has been calculated by multiplying monthly rate by amount financed. Now, we will calculate break even annual rate at which interest from short term financing and long term financing is equal. Break - Even Annual Rate = 12x Interest Amount financed = 12 * $374.17 $46,600 = 0.09635 079.66%

The long term financing rate is 9.64% (approx) which represents break even between short term financing and long term financing.