Need help with Cash Management please!

taraskyn

Hi all!
Osborne Books, Cash Management, Workbook, Practice assessment 2, task 2.4

The question is to find the best possible option of funding for the business and calculate:
1. Loan interest
2. Arrangement fee
3. Overdraft interest
4 and Total
There are three financing option given to choose from.
First two I understand.

The third one is this one:

Each of three partners will take out the personal secured loan of 32000 repayable over five years at an interest rate of 2.5%. These monies will then be loaned to the partnership as increased capital. Interest of 4% per annum is payable by the partnership to the partners.


All I need here actually is to calculate the loan interest for the first year of financing.

The correct answer by the way is: £ 3840.

The only way I can come up with this is: 32000 x 2.5% x 5years - 4% = 3840, but it does not quite make sense to me.

Anyone can help please.

Thanks!!!

topcat

taraskyn wrote: »

Hi all!
Osborne Books, Cash Management, Workbook, Practice assessment 2, task 2.4

The question is to find the best possible option of funding for the business and calculate:
1. Loan interest
2. Arrangement fee
3. Overdraft interest
4 and Total
There are three financing option given to choose from.
First two I understand.

The third one is this one:

Each of three partners will take out the personal secured loan of 32000 repayable over five years at an interest rate of 2.5%. These monies will then be loaned to the partnership as increased capital. Interest of 4% per annum is payable by the partnership to the partners.


All I need here actually is to calculate the loan interest for the first year of financing.

The correct answer by the way is: £ 3840.

The only way I can come up with this is: 32000 x 2.5% x 5years - 4% = 3840, but it does not quite make sense to me.

Anyone can help please.

Thanks!!!

Hi there !

The answer £3840 is coming from

32000 * 3 (three partners)= 96000
96000 * 4% = 3840

Which is the arrangement fee.

just to double check are you sure your not calculating the arrangement fee?

taraskyn

Thanks.
Yes I am sure. It is for loan interest.
But where 2.5% gone?

taraskyn

Ok, so as I understand the 2.5% is partners personal headache and it does not add any cost to the business.
Business will have to pay 4% on new capital invested by partners. So the cost of the loan to the business in the amount of £96000 will be 4% which is £3840.
Am I correct???

MarieNoelle

Hi taraskyn,
I first calculate the total amount lent to the business 3 x 32,000 = £96,000
The interest rate is 4% per annum so £96,000 x 4% = £3840 - this is the cost for the partnership of the loan interest.
Is this clearer?
MN

Edit: I was a bit slow!

taraskyn

Thanks!!!!!!!!!!!!!! All clear now!