Question

A business owner needs a loan to cover the first year of fixed costs associated with launching a new product. She has 2 options:

- the first loan option would need to be repaid in 12 equal payments, with a fixed cost of borrowing set at $1.35 million.

- the other option would charge a simple interest payment plan of 2.5% (on whatever the principal is) and it would need to be repaid within six months.

The amount of money required is not given. Compare the two options and find the point at which the borrowing cost of option 2 equal options 1.

Answer 1

Answer
First Option
The loan need to be repaid in 12 equal payments, with a fixed cost of borrowing set at $1.35 million
Borrowing Cost	$ 1.35m
Second Option
Simple interest payment plan of 2.5% (on whatever the principal is) and it would need to be repaid within six months.
Six months Interest @ 2.5 % should be equal to $1.35m
Let Principal Amount be X
X*2.5%*6/12                  =	$      1,350,000.00
X*2.5%                            =	1350000*12/6
	$      2,700,000.00
X                                       =	2700000*100/2.5
X                                       =	$ 108,000,000.00
So the Principal amount where interest under two option is equal is $108,000,000