Your friend has offered to lend you some money. You decide to borrow $1,800 and agree to pay back $2,000 in 2 years. Alternatively, you could borrow $1,800 for two years from your bank that is charging 4.5% per annum. Explain which option you should choose, showing computations.

Your friend has offered to lend you some money. You decide to borrow $1,800 and agree to pay back $2,000 in 2 years. Alternatively, you could borrow $1,800 for two years from your bank that is charging 4.5% per annum. Explain which option you should choose, showing computations.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 3PB: Use the tables in Appendix B to answer the following questions. A. If you would like to accumulate...

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Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.

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Your friend has offered to lend you some money. You decide to borrow $1,800
and agree to pay back $2,000 in 2 years. Alternatively, you could borrow $1,800
for two years from your bank that is charging 4.5% per annum. Explain which
option you should choose, showing computations.

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