Question

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

January	$	9,700	April	$	9,700
February		3,700	May		10,700
March		4,700	June		5,700

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

January	6.0	%	April	13.0	%
February	7.0	%	May	12.0	%
March	10.0	%	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.)
  

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.)   

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

a). Carmen’s Beauty Salon Short-term financing

Month	Rate	Monthly Rate	Amount Financed	Monthly Interest
January	6%	0.50%	$ 9,700	$ 48.50
February	7%	0.67%	$ 3,700	$ 21.58
March	10%	0.83%	$ 4,700	$ 39.17
April	13%	1.08%	$ 9,700	$105.08
May	12%	1.00%	$10,700	$107.00
June	12%	1.00%	$ 5,700	$ 57.00

Total $378.33

b1). Carmen’s Beauty Salon Short-term financing

Month	Rate	Monthly Rate	Amount Financed	Monthly Interest
January	12%	1.00%	$ 9,700	$ 97.00
February	12%	1.00%	$ 3,700	$ 37.00
March	12%	1.00%	$ 4,700	$ 47.00
April	12%	1.00%	$ 9,700	$ 97.00
May	12%	1.00%	$10,700	$107.00
June	12%	1.00%	$ 5,700	$ 57.00

Total $442.00

b2). Total dollar interest payments would be larger under the long-term financing plan.