In Problem 1, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing?
Problem 1: Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
|
January
|
98.000
|
April
|
$8.000
|
|
February
|
2.000
|
May
|
9.000
|
|
March
|
3.000
|
June
|
4.000
|
Short-term financing will be utilized for the next six months. Projected annual interest rates are:
|
January
|
8.0%
|
April
|
15.0%
|
|
February
|
9.0
|
May
|
12.0
|
|
March
|
12.0
|
June
|
12.0
|
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer sum up the monthly interest payments.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.