Question

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

January $ 10,000 April $ 10,000

February 4,000 May 11,000

March 5,000 June 6,000

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

January 9.0 % April 16.0 %

February 10.0 % May 12.0 %

March 13.0 % 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.)

Total dollar interest payment _______

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.)

Total dollar interest payment ________

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

Larger

Answer 1

Month	Amount to be raised	Interest Rate	Interest
January	10000	0.09	=10000*9%*6/12
February	4000	0.1	=4000*10%*5/12
March	5000	0.13	=5000*13%*4/12
April	10000	0.16	=10000*16%*3/12
May	11000	0.12	=11000*12%*2/12
June	6000	0.12	=6000*12%*1/12

a)	Total Interest=	1513.33
b)1)	If Interest Rate was 12% Total Interest	1580
b)2)	Hence the total-dollar interest payments is larger than with the short-term financing plan, by an amount of 66.67.