Carmen’s Beauty Salon has estimated monthly financing
requirements for the next six months as follows:
January | $ | 9,500 | April | $ | 9,500 |
February | 3,500 | May | 10,500 | ||
March | 4,500 | June | 5,500 | ||
Short-term financing will be utilized for the next six months.
Projected annual interest rates are:
January | 9 | % | April | 16 | % |
February | 10 | May | 12 | ||
March | 13 | June | 12 | ||
What long-term interest rate would represent a break-even point
between using short-term financing and long-term financing?
Answer |
Month Annual rate Monthly rate Amount financed monthly interest |
Jan 9% 0.75% 9500 71.25 |
Feb 10% 0.83% 3500 29.17 |
Mar 13% 1.08% 4500 48.75 |
Apr 16% 1.33% 9500 126.67 |
May 12% 1.0% 10500 105 |
Jun 12% 1.0% 5500 55 |
Total 43000 435.83 |
Break-even annual rate = 12 x (Interest expense / amount financed) |
12 x (435.83 / 43000) |
12.16% |
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: ...
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