Question

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

January	$	10,300	April	$	10,300
February		4,300	May		11,300
March		5,300	June		6,300

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

January	7.0	%	April	14.0	%
February	8.0	%	May	12.0	%
March	11.0	%	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?
  

	Larger
	Smaller

Answer 1

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

Month	Rate	Monthly Rate	Amount Financed	Monthly Interest
January	7%	0.58%	$10,300	$ 60.08
February	8%	0.67%	$ 4,300	$ 28.67
March	11%	0.92%	$ 5,300	$ 48.58
April	14%	1.17%	$10,300	$120.17
May	12%	1.00%	$11,300	$113.00
June	12%	1.00%	$ 6,300	$ 63.00

Total $433.50

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

Month	Rate	Monthly Rate	Amount Financed	Monthly Interest
January	12%	1.00%	$10,300	$103.00
February	12%	1.00%	$ 4,300	$ 43.00
March	12%	1.00%	$ 5,300	$ 53.00
April	12%	1.00%	$10,300	$103.00
May	12%	1.00%	$11,300	$113.00
June	12%	1.00%	$ 6,300	$ 63.00

Total $478.00

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