Question

You are the owner of four Taco Bell restaurant locations. You have a business loan with Citizens Bank taken out 60 days ago that is due in 90 days. The amount of the loan is $40,000 , and the rate is 9.5% using ordinary interest.

You currently have some excess cash. You have the choice of sending Citizens $25,000 now as a partial payment on your loan or purchasing an additional $25,000 of serving supplies such as food containers, cups, and plastic dinnerware for your inventory at a special discount price that is “ 10% off” your normal cost of these items.

How much interest will you save on this loan if you make the partial payment and don’t purchase the additional serving supplies?

Answer 1

Interest to be paid if there is no partial payment=40000*9.5%*90/360=$950
Interest to be paid if there is a partial payment of $25000 after 60 days:
Interest for 60 days (Before partial payment) =40000*9.5%*60/360=$633
On partial payment of $25000, $633 is towards interest
Principal reduction=25000-633=24367
Outstanding principal after partial payment=40000-24367=15633
Interest for 30 days (After partial payment) =15633*9.5%*30/360=$124
Interest to be paid if there is a partial payment =633+124=$ 757
Hence,savings in interest=950-757=$193