Financing is when you are requesting any loan from a bank

February 13, 2019 Critical Thinking

Financing is when you are requesting any loan from a bank, credit union, finance company or a person and guarantee a repayment in the future. In this assignment, I will analyze the scenarios bellow to choose which one would be best for my business.

Investor #1
In the first scenario, the investor offered Pour Toi Hair a loan of $300,000 with a rate of 8%. This loan needs to be repaid in a 5 years period. which means you need to pay the entire loan by the end of that 5 years. To see if this deal will be best for me, I have to calculate the total pay and the interest pay.
Amount
$300,000
Period (years)
5
Interest rate
8%

To find the payment I need to repay in 5 years, I used this formula FV = PV × (1 + r) n
300,000*(1+0.08)5 = $440,798.42
Also, I looked for interest I need to pay for the loan.
$440,798.42 – $300,000 = $140,798.42

Investor #2
In the second scenario, the investor offered Pour Toi Hair a loan of $300,000 with a rate of 8%. Which is almost the same as the first scenario. The differences is that Pour Toi Hair has to repay this money by paying only the interest every year for 4 years. Also, pay the principal amount and the final interest payment at end of 5th year. To analyze the scenarios, I have to also calculate total payment and the interest pay.
Amount
$300,000
Period (years)
5
Interest rate
8%

I look for the annual Interest Payment: 8% * $300,000.00 = $24,000.00
To find the amount paying in year 5, I used this formula FV = PV × (1 + r) n
300,000*(1+0.08)1 = $324,000.00
4 years interest payment: $24,000.00 * 4 = $96,000.00
I look for the total payment: $96,000.00 + $324,000.00 = $420,000.00
And at last, I look for the interest paid: $420,000.00 – $300,000.00 = $120,000.00

After looking deeply into both scenarios, I realized that the best investor will be the investor #2 because my repayment amount will be smaller than the first investor. Paying less will give me the advantage of fully paying the loan back.