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Concepts Learned to a Real-life Simulation Experience

Now, on the right hand side of the equation, ‘e’ is taken as the number of times the interest is compounded. Now if we substitute the values in the equation we can get the following results. National First Prime Rate 3.25% Floor Rate 6.75% Number of times compounded Semiannually i 0.1 e 2 a 10.25% Regions Best Prime Rate 13.17% Number of times compounded Monthly i 13.17% e 12 a 13.99% (ii) Thus it is apparent from the above calculation that the company should borrow from National First Bank as it is charging interest at a lesser Equivalent rate which is 10.25%. If we suppose that the company acquires loan amounting to $ 8 million, then following will be the annual interest charge that the company will have to record in its income statement Loan Amount Bank Rate on interest Interest Charge $ 8,000,000 National First 10.25% $ 820,000.00 $ 8,000,000 Regions Best 13.99% $ 1,119,200.00 Thus it is apparent from the above calculation that in case of National First Bank, the company would have to pay lesser amount of interest as compared to that if the loan amount was obtained from Regions Best Bank. By adopting to obtain funds from National First, the company will save $299,200 on account of interest payments. (iii) Evaluating the proposal of Regions Best, the following formula is to be used (Figure a) The above mentioned formula is termed as the formula for ‘annuity’ in which “P” is the present value of the cumulative amount, “R” is the period payments, “I” is the period interest rate and “n” is the number of period for which the funds were borrowed. As per the terms decided with the Regions Best, the company will pay interest at 8.6% which shall be compounded monthly (that is why the ‘I’ in the formula of annuity has been divided by 12). Substituting the values we get P $ 6,950,000 i 8.60% n 5 years R $142,925 monthly Following is the loan schedule further explaining the computation Loan Schedule Months Opening Balance Annual Payments Interest Charged (8.6/12) Principal Paid Closing Balance 1 6,950,000 142,925 49,808 93,117 6,856,883 2 6,856,883 142,925 49,141 93,784 6,763,099 3 6,763,099 142,925 48,469 94,456 6,668,643 4 6,668,643 142,925 47,792 95,133 6,573,510 5 6,573,510 142,925 47,110 95,815 6,477,695 6 6,477,695 142,925 46,423 96,502 6,381,193 7 6,381,193 142,925 45,732 97,193 6,284,000 8 6,284,000 142,925 45,035 97,890 6,186,110 9 6,186,110 142,925 44,334 98,591 6,087,519 10 6,087,519 142,925 43,627 99,298 5,988,221 11 5,988,221 142,925 42,916 100,010 5,888,212 12 5,888,212 142,925 42,199 100,726 5,787,485 13 5,787,485 142,925 41,477 101,448 5,686,037 14 5,686,037 142,925 40,750 102,175 5,583,862 15 5,583,862 142,925 40,018 102,907 5,480,955 16 5,480,955 142,925 39,280 103,645 5,377,310 17 5,377,310 142,925 38,537 104,388 5,272,922 18 5,272,922 142,925 37,789 105,136 5,167,786 19 5,167,786 142,925 37,036 105,889 5,061,897 20 5,061,897 142,925 36,277 106,648 4,955,249 21 4,955,249 142,925 35,513 107,412 4,847,836 22 4,847,836 142,925 34,743 108,182 4,739,654 23 4,739,654 142,925 33,968 108,958 4,630,696 24 4,630,696 142,925 33,187 109,738 4,520,958 25 4,520,958 142,925 32,400 110,525 4,410,433 26 4,410,433 142,925 31,608 111,317 4,299,116 27 4,299,116 142,925 30,810 112,115 4,187,001 28 4,187,001 142,925 30,007 112,918
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