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Your business needs a refurbishment.  This will cost $15 000.

 

Finance company A will lend you the money using a simple interest rate of 12.5% over 5 years. 

 

Finance company B will lend you the money using a simple interest rate of 10.2% over 6 years. 

 

Which finance company offers the best deal?  Justify your response by showing all calculations for both finance companies.

Guest Aug 21, 2017
edited by Guest  Aug 21, 2017
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 #1
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Company A : Principal sum  X (1.125)^5

Company B : Principlal sum X (1.102)^6

 

 

Notice that you don't need to actually involve the principal sum in the calculation.  You just need to evaluate the exponentials.

(1.125)^5      compared with  (1.102)^6      and see which is the least for the best deal.

frasinscotland  Aug 21, 2017
 #2
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No, frasinscotland.

 

What you did is compound interest. The question clearly says simple interest.

 

Finance Company A: $15,000 x 0.125 =$1,875.00 simple interest for 1 year.

$1,875.00 x 5 years =$9,375.00 Interest cost for 5 years.

 

Finance Company B: $15,000 x 0.102 =$1,530.00 simple interest for 1 year.

$1,530.00 x 6 years =$9,180.00 Interest cost for 6 years.

 

As you can see, Finance Company B is slightly cheaper by $195. This is on the assumption that no principal is paid back until maturity of 5 and 6 years respectively.

Guest Aug 21, 2017

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