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.

 Aug 21, 2017
edited by Guest  Aug 21, 2017

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.

 Aug 21, 2017

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.

 Aug 21, 2017

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