Question

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

January	$	9,100	April	$	9,100
February		3,100	May		10,100
March		4,100	June		5,100

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

January	5.0	%	April	12.0	%
February	6.0	%	May	12.0	%
March	9.0	%	June	12.0	%

-Compute total dollar interest payments for the six months. (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.)
  

-Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months? (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.)   

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

January	$	10,000	April	$	10,000
February		4,000	May		11,000
March		5,000	June		6,000

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? (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

A.

	January	February	March	April	May	June	Total
Monthly Financing Requirements	$ 9,100.00	$ 3,100.00	$ 4,100.00	$ 9,100.00	$ 10,100.00	$ 5,100.00	$ 40,600.00
Annual interest rate	5%	6%	7%	12%	12%	12%
Monthly interest rate	0.42%	0.50%	0.58%	1.00%	1.00%	1.00%
Interest Payment	$ 38.22	$ 15.50	$ 23.78	$ 91.00	$ 101.00	$ 51.00	$ 320.50

	January	February	March	April	May	June	Total
Monthly Financing Requirements	$ 9,100.00	$ 3,100.00	$ 4,100.00	$ 9,100.00	$ 10,100.00	$ 5,100.00	$ 40,600.00
Annual interest rate	12%	12%	12%	12%	12%	12%
Monthly interest rate	1.00%	1.00%	1.00%	1.00%	1.00%	1.00%
Interest Payment	$ 91.00	$ 31.00	$ 41.00	$ 91.00	$ 101.00	$ 51.00	$ 406.00

B.

	January	February	March	April	May	June	Total
Monthly Financing Requirements	$ 10,000.00	$ 4,000.00	$ 5,000.00	$ 10,000.00	$ 11,000.00	$ 6,000.00	$ 46,000.00
Annual interest rate	9%	10%	13%	16%	12%	12%
Monthly interest rate	0.75%	0.83%	1.08%	1.33%	1.00%	1.00%
Interest Payment	$ 75.00	$ 33.20	$ 54.00	$ 133.00	$ 110.00	$ 60.00	$ 465.20

Break even long term interest rate == (Total monthly interest payments/Total monthly financing requirements) * 12

Breakeven long term interest rate = ($465.20/$46,000)*12 = 12.14%