Question

A farmer meets his short-term capital needs by establishing a line of credit and borrowing as...

A farmer meets his short-term capital needs by establishing a line of credit and borrowing as follows. All the borrowed money plus interest is paid back on August 1 when the crop is sold. Calculate the approximate total amount of interest paid, assuming a 5% annual interest rate.

March 1                      $40,000

April 1                        $15,000

May 1                         $9,000

June 1                         $20,000

a. $16,350

b. $1,789

c. $4,200

d. $1,373

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Homework Answers

Answer #1

Solution -

Formula of Calculating Total Payment -

Total Payment on August 1-

Total Payment =

Total Payment = 40,000 * 1.021 + 15,000 * 1.0167 + 9,000 * 1.0125 + 20,000 * 1.008

Total Payment = $40,840.31 + $15,251.57 + $9,112.97 + $20,167.01

Total Payment =$85,372

Total Interest = Total Payment - Borrowed Amount

Total Interest = $85,372 - ($40,000 + $15,000 + $9,000 + $20,000)

Total Interest = $85,372 - $84,000

Total Interest = $1,372 (Approx.)

The correct Answer is Point D. i.e. $1,372.

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