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.
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.
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.