Another Practice question disapointment

steve2008

Cash Management practice test 2.
Question 2.4.

In this question it gives you a projected cash flow and asks for information as to whether the O/D or loan is more suited over the 12 month period

It asks for the total costs of using the O/D. Clearly AAT just want you to get 1% of each of the monly overdrawn balances and this is reflected in the answers. However, the information provided proves this answer is wrong.

"Interest is calculated monthly and charged on the bank balance at the end of each month where the overdraft is used"

The balance given at the end of february is -6,700. So that would give an interest charge of £67, to be charged to the bank account at the end of February. This will then make the March balance of -12,200 to be -12,267. and the interest payment due for that month would be 67p more (rounding off to £1).

steve2008

(Sorry, I accidentally hit enter while typing the above and cant find the edit button, here is the last half)

Then we come to the arrangement fee. Although not explicitly stated in the question it is most irregular for the arrangement fee to be paid at the end of the period. So the £100 should reduce the predicted bank balance from January, meaning even higher Interest charges. imo, totaling £576, £22 more than in the answer.

As I'm here I will also comment on the uselessness of option 2. October has the lowest bank balance over the 12 months, yet by then the company would have already paid 12480 back from the loan resulting in an overdrawn bank balance without a facility to be overdrawn.