The firm has contacted a bank to negotiate a loan to purchase the legal tech' software. A loan of £10,000 will be needed and the bank has offered three options, each to begin on 1st February 2023: (1) (ii) £10,000 loan at 6% simple interest. The entire loan is to be repaid in one lump sum after five years, with interest paid at the end of each year of the loan. £10,000 loan at 4% compound interest with amortised monthly repayments for five years (iii) £10,000 loan at 4.5% compound interest, with both interest and principal to be paid in one lump sum at the end of five years. Calculate the total of interest to be paid under each of the three options. Show your workings in full.

The firm has contacted a bank to negotiate a loan to purchase the legal tech' software. A loan of £10,000 will be needed and the bank has offered three options, each to begin on 1st February 2023: (1) (ii) £10,000 loan at 6% simple interest. The entire loan is to be repaid in one lump sum after five years, with interest paid at the end of each year of the loan. £10,000 loan at 4% compound interest with amortised monthly repayments for five years (iii) £10,000 loan at 4.5% compound interest, with both interest and principal to be paid in one lump sum at the end of five years. Calculate the total of interest to be paid under each of the three options. Show your workings in full.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

See similar textbooks

Similar questions

Firms use several techniques to estimate risk, see Chapter 8. After describing these techniques, explain how firms incorporate risk in the investment evaluation process. Give examples of alternative ways a firm can use to estimate the cost of equity, and by extension the Weighted-Average Cost of Capital (WACC or Kw). Be specific as to the reasons firms use multiple hurdle rates when considering different investment projects.
Explain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.
The following are investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Question: Which one of these is the most valuable from a financial point of view, and why? (Answer the question correctly and in-depth.)
Explain how you would evaluate the expected rate of return from the investment (purchasing a company) and the method to evaluate the investment decision. Assess the disadvantages and advantages of the investment method and why the method would provide the most accurate measure for the anticipated rate of return requirement. Justify your recommendation.
Show all the calculation working
As a Businessman and Entrepreneur, which do you think is more important between Return On Asset (ROA) and Return On Investment (ROI)? Choose only one and explain.
Which of the following is a drawback of payback period method of investment appraisal? Oit is cash flow based OIt consider the time value of money it does not measure potential impact on shareholder wealth OIt is profit based
What are two crucial presuppositions we make when we choose to use the present cost of capital of a firm to evaluate the profitability of projects in which we invest? Be thorough.
Discuss how the Accounting Rate of Return as an investment appraisal method is better than the Net Present Value method.
Introduction Net Present Value is a financial measure used to evaluate the profitability of an investment or project. If an NPV is positive, it suggests that the investment is profitable to the investor, while a negative NPV indicates potential losses. It helps in decision-making by considering the cost of capital and determining whether an investment adds value to the business.
Which approach to investment analysis is "best" in terms of accounting for both the timing and amount of revenue streams from a potential investment? A. the payback period B. the simple rate of return C. the net present value D. the internal rate of return
Which statements are INCORRECT? Check all that apply: when IRR is positive, the project is acceptable when profitability index is positive, the project is acceptable a decrease in a firm's WACC will increase the attractiveness of the firm's investment options when required return is less than internal rate of return, the project is acceptable