Answer:
2021 avoidable interest $453,000
2022 avoidable interest$ 382,348.50
Total Cost: 8,565,348.50
Interest expense 2021: $ 967,000
Interest expense 2022: $ 1,037,651.5
Explanation:
First, we solve for the weighted capitalized expenditures:
construction capitalized interest
Month Nominal Weight Weighted
Jan 1 1,680,000.00 1 1,680,000.00
March 1 1,260,000.00 0.83 1,050,000.00
June 30 1,460,000.00 0.5 730,000.00
October 1 1,260,000.00 0.25 315,000.00
3,775,000.00
Specific borrowing
3,775,000 x .12 = 453,000.00
As we don't have more expenditure subject to capitalization we avoid this interest.
2022
Month Nominal Weight Weighted
Jan 1 3,775,000.00
Jan 31 $ 369,000.00 0.11 41,000.00
April 30 $ 702,000.00 0.55 390,000.00
August 31 $ 999,000.00 0.11 <u> 111,000.00 </u>
4,317,000.00
Then, we solve for the capitalized interest:
specifit interest:
4,000,000 x 12% x 9/12 = 360,000.00
weigthed rate for non-specific borrowing:
principal rate interest
3,000,000 0.08 240,000
7,000,000 0.1 700,000
10,000,000 940000
total interest / total principal 0.094
317,000.00 x 0.094 x 9/12 = 22,348.50
total interest capitalized $ 382,348.50
Total cost of the building:
sum of capital expenditures nominal:
7,730,000.00
plus capitalized interest 2021:
453,000
plus capitalized interest 2022:
382,348.50
Total Cost: 8,565,348.50
Interest expense 2021:
480,000 specific borrowing + 940,000 non-specifit - 453,000 avoided
967,000
Interest expense 2022:
480,000 specific borrowing + 940,000 non-specifit - 382,348.50 avoided
1.037.651,5
