Question

Evaluating alternative notes
The data for two alternatives for a loan are provided in the table below.
DATA
Number of days per year		360
		Alternative 1	Alternative 2
Principal amount of note		$510,000	$510,000
Interest rate		4%
Note discount rate			4%
Term of note, days		90	90
Using formulas and cell references, perform the required analysis, and input your answers into the Amount column. Transfer the numeric results for the green entry cells (D15:D17) into the appropriate fields in CNOWv2 for grading.
			Amount	Formulas
a.	Amount of the interest expense for each alternative
b.	Proceeds received by the borrower under alternative 1
	Proceeds received by the borrower under alternative 2

1. Calculate the amount of the interest expense for each option. Round your answer to the nearest dollar.

   $( ) for each alternative.

2. Determine the proceeds received by the borrower in each alternative. Round your answers to the nearest dollar.

   (1) $510,000, 90-day, 4% interest-bearing note: $ ( )

   (2) $510,000, 90-day note discounted at 4%: $ ( )

3. Alternative (1 or 2) is more favorable to the borrower because the borrower ( receives more cash / Pays more interest/ has an extension of time to pay)

Answer 1

a. Calculate the amount of interest expense for each option

Interest formula =

Alternative 1:

Principal amount = $510,000

Interest rate = 4% = 0.04

Term of note = 90 days

Interest = = $ 5,100

Alternative 2:

Discount rated amount is the amount deducted from the principal amount.

Principal amount = $510,000

Discount rate = 4% = 0.04

Term of note = 90 days

Interest or discount on note = = $5100

b. Proceeds received by borrower in each alternative

Proceeds are available to the borrower at the time the note is taken out.

Proceeds in Alternative 1 = $510,000

In alternative 1 the borrower will receive the principal amount of $510,000

Proceeds in alternative 2 = Principal amount - Discount

= $510,000 - $5,100 = $ 504,900

In alternative 2, the borrower will receive an amount of $504,900 by reducing the interest.

c. Which alternative is more favorable to the borrower.

Alternative 1 is favorable. Since receives more cash when compared to alternative 2.

In alternative 1, the borrower has to pay extra $5,100 as interest, with respect to $515,100 ($510,000+$5,100) both principal amount and interest amount at the time when the note is due to be paid.

In alternative 2, the borrower lose $5,100 at the time of discounting note and receives proceeds of $504,900, and at the time of payment he has to pay $510,000 with an extra of $5,100. Hence the borrower has to lose $10,200 (5,100 + 5,100).