Answer to Question #91217 in Economics of Enterprise for braw

Question

An investor company has hired you to assess the viability of a project “Education Centre” to be implemented in Sulaimani. The investor’s minimum rate of return is 9% while the rate of inflation in the region is 7.2%. A proposal has been submitted to bank A and B to borrow the capital to construct the building for the education centre. Bank A requests 18% on simple interest rate for 15 years whereas Bank B request 11% compounding monthly for 12 years.

Answer 1

If Bank A requests 18% on simple interest rate for 15 years whereas Bank B request 11% compounding monthly for 12 years, then Bank A future value will be higher by (1 + 0.18×15) = 3.7, and Bank B future value will be higher by (1 + 0.11/12)^(12×12) = 3.72, so the Bank A proposal is better.