Question

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

January	$	10,200	April	$	10,200
February		4,200	May		11,200
March		5,200	June		6,200

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

January	6	%	April	13	%
February	7		May	12
March	10		June	12

What long-term interest rate would represent a break-even point between using short-term financing and long-term financing?

Answer 1

Month          Annual rate       Monthly rate              Amount financed          monthly interest

Jan              6%                     0.5%                          10,200                           51

Feb              7%                     0.58%                        4,200                            24.36

Mar              10%                   0.83%                        5,200                           43.16

Apr               13%                   1.08%                       10,200                           110.16

May              12%                   1.0%                         11,200                          112

Jun               12%                    1.0%                        6,200                             62

Total                                                                        47,200                           402.68

Break-even annual rate = 12 x (Interest expense / amount financed)

= 12 x (402.68 / 47,200)

= 10.24%