Question

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

January	\(8,500
February	\)2,500
March	\(3,500
April	\)8,500
May	\(9,500
June	\)4,500

Short-term financing will be utilized for the next six months.

January	9%
February	10%
March	13%
April	16%
May	12%
June	12%

Here are the projected annual interest rates:

a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.

b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.

Short answer

The interest payable in the finance plan described in part a is $375.35 and $370 in part b. The interest payments will be smaller in part b.

Step-by-step solution

Calculation of monthly interest payable for six months

The total monthly interest payable for six months is $375.35.

Month	Rate	On monthly basis	Amount	Actual interest expense
January	9%	0.75%	$8,500	$63.75
February	10%	0.83%	$2,500	$20.75
March	13%	1.08%	$3,500	$37.80
April	16%	1.33%	$8,500	$113.05
May	12%	1%	$9,500	$95.00
June	12%	1%	$4,500	$45.00
				$375.35

Calculation of monthly interest payable for six months

The total monthly interest payable for six months is $370.

Month	Rate	On monthly basis	Amount	Actual interest expense
January	12%	1%	$8,500	$85
February	12%	1%	$2,500	$25
March	12%	1%	$3,500	$35
April	12%	1%	$8,500	$85
May	12%	1%	$9,500	$95
June	12%	1%	$4,500	$45
				$370

Hence, the interest payments will besmaller if a long-term financing rate is used.