Question 1204370: 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 $50,000, and the rate is 9.5% using ordinary interest.
You currently have some excess cash: $25,000. Due to situations beyond your control, you, as the owner, must make an immediate business decision now to pursue only one of these two choices:
1) sending all of the $25,000 to Citizens Bank as a partial payment on your loan, or
2) using the $25,000 to purchase serving supplies such as food containers, cups, and plastic dinnerware for your inventory. This is the last day to take advantage of the opportunity to save some money due to a special discount price that is "10% off" the normal cost of $25,000 for these items.
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! i thought i solved this earlier but i couldn't find it.
i did create an excel spreadsheet that had the answers.
here it is.
option 1 was to use the 25,000 to reduce the remaining balance on the loan and then to buy the inventory at full cost, presumably at the end of the loan period.
in this option, you had 50,000 borrowed for 60 days and then 25,000 borrowed for the remaining 90 days.
option 2 was to keep the loan at 50,000 for the 90 day period on top of the existing 60 day period that just completed, and use the 25,000 to buy the inventory at 10% discount.
the results of the analysis indicated tht it was better to buy the inventory at 10% discount and leave the loan at 50,000 for the rmeaining 90 day period.
i included the 60 day period in the analysis, but didn't have to, because the costs for the first 60 days were the same in both plans and would not have affected the difference between the plans.
as indicated in the excel spreadsheet, the difference between the plans was 1,906.25
plan 1 costs were:
25000 to reduce the remaining balance on the loan for the remaining 90 days of he loan period.
593.75 interest on the 25,000 remaining balance on the loan for the next 90 days.
25000 for the inventory.
25000 to pay off the remaining principal on the loan.
791.67 interest on the 50000 loan for the first 60 days.
total cost was 25000 + 593.75 + 25000 + 25000 + 791.67 = 76385.42.
plan2 costs were:
1187.5 interest on the 50,000 remaining balance on the loan for the next 90 days.
22500 for the inventory after 10% discount was applied.
50000 to pay the principal on the loan at the end of the loan period.
791.67 interest on the 50000 loan for the first 60 days.
total cost was 1187.5 + 22500 + 50000 + 791.67 = 74479.17
difference between the plans was 76385.42 minus 74479.07 = 1906.25, as shown in the spreadsheet.
your solution is that it was cheaper to take advantage of the discount.
you saved 2500 from the discount but it cost you an extra 593.75 interest on the remaining balance of the loan for a net savings of 1906.25.
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