Question

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

January	$	8,200	April	$	8,200
February		2,200	May		9,200
March		3,200	June		4,200

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

January	6.0	%	April	13.0	%
February	7.0	%	May	12.0	%
March	10.0	%	June	12.0	%

a. 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.)
  

b-1. 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-2. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller than with the short-term financing plan?
  

	Smaller or
	Larger

Answer 1

Ans-a- Computation of total dollar interest payments for six months:

Months	January	February	March	April	May	June	Total
Financing Requirements (A)	8,200	2,200	3,200	8,200	9,200	4,200	35,200
Financing Rate (B)	6%	7%	10%	13%	12%	12%
Monthly Interest Payments (A*B*1/12)	$41	$12.83	$26.67	$88.83	$92	$42	$303.33

Therefore, total interest payments for six months is-$303.33

Ans-b-1-Computation the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months:

Months	January	February	March	April	May	June	Total
Financing Requirements (A)	8,200	2,200	3,200	8,200	9,200	4,200	35,200
Financing Rate (B)	12%	12%	12%	12%	12%	12%
Monthly Interest Payments (A*B*1/12)	$82	$22	$32	$82	$92	$42	$352

Therefore, Total interest payments for six months is-$352.

Ans-b-2- If long-term financing at 12 percent had been utilized throughout six months, the total-dollar interest payments would be larger than with the short-term financing plan.

Larger $352 $303.33

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