Need help with Cash Management please!

taraskyntaraskyn Feels At HomeLondonPosts: 41Registered
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!!!

Comments

  • topcattopcat Trusted Regular Posts: 452Registered
    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?
  • taraskyntaraskyn Feels At Home LondonPosts: 41Registered
    Thanks.
    Yes I am sure. It is for loan interest.
    But where 2.5% gone?
  • taraskyntaraskyn Feels At Home LondonPosts: 41Registered
    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???
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderPosts: 1,461Moderator, MAAT, AAT Licensed Accountant
    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!
  • taraskyntaraskyn Feels At Home LondonPosts: 41Registered
    Thanks!!!!!!!!!!!!!! All clear now!
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