Assume you need TSh. 40 million net to fund a small income - generating project. Two institutions offered to lend you the finances you need. Their credit terms are as follows: (i) Institution A offers to lend you a 12.5% annual interest rate reducing balance but charges a processing fee of 3.0% (VAT inclusive) together with an insurance fee of 1.8%. Institution B on the other hand offers to lend you the same amount at 13% reducing the balance but charges a 2.8% processing fee (VAT inclusive) together with an insurance fee of 1.5%. Both the insurance and processing fees are paid up - front. The term of the credit offer is two years. Required: (a) Based on the insurance and loan processing fees alone, which institution would you prefer? (b) Taking all the terms and conditions of the loan into account, which institutions would you prefer to be a supplier of the funds that you need? (c) Evaluating both the patterns in the interest and principal repayment components over time, why do you think the institutions would benefit from having such patterns in their instalment plans? In attempting the above problems use the knowledge, you acquired in Knowledge areas one, two, and three of the course.
Assume you need TSh. 40 million net to fund a small income - generating project. Two institutions offered to lend you the finances you need. Their credit terms are as follows: (i) Institution A offers to lend you a 12.5% annual interest rate reducing balance but charges a processing fee of 3.0% (VAT inclusive) together with an insurance fee of 1.8%. Institution B on the other hand offers to lend you the same amount at 13% reducing the balance but charges a 2.8% processing fee (VAT inclusive) together with an insurance fee of 1.5%. Both the insurance and processing fees are paid up - front. The term of the credit offer is two years. Required: (a) Based on the insurance and loan processing fees alone, which institution would you prefer? (b) Taking all the terms and conditions of the loan into account, which institutions would you prefer to be a supplier of the funds that you need? (c) Evaluating both the patterns in the interest and principal repayment components over time, why do you think the institutions would benefit from having such patterns in their instalment plans? In attempting the above problems use the knowledge, you acquired in Knowledge areas one, two, and three of the course.
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