Answer:
AI = $1,424,864
Hence, the avoidable interest for the Monty's project is $1,424,864.
Explanation:
Note: This question is incomplete and lacks necessary data to answer this question. But I have found similar question on the internet and will be using its data in this question to answer for the sack of concept and understanding. Thank you!
Data Given:
Total Cost = $7,280,000
Weighted-Average amount = $5,040,000
We need to compute the avoidable interest on this project.
Data Missing:
Construction loan amount = $2,800,000
Construction loan Interest Rate = 12%
Construction loan Time period = Semi-Annually.
Construction loan Issued = 31 Dec, 2019
Short-term loan amount = $1,960,000
Short-term loan interest 10%
Short-term loan Time period = Monthly payable
Short-term loan Maturity period = 30 May, 2021
Long-term loan amount = $1,400,000
Long-term loan interest rate = 11%
Long-term loan Time period = Annually on 1st January
Long-term loan Principal Payable = 1 Jan, 2024
Solution:
Now, this question is complete and can be solved.
First of all, we need to calculate the general borrowings in construction of the building.
Let X be the general borrowings in construction of the building.
Let Y be Weighted average
Let Z be the Construction for whole year
Where, Y = $5,040,000
Z = $2,800,000
So,
X = Y - Z
X = $5,040,000 - $2,800,000
X = $2,240,000 (This is the general borrowings)
Now, we have to calculate the weighted average interest rate in order to calculate the avoidable interest on this project.
Weighted average interest rate = (Short term loan interest rate x short term loan amount divided by Sum of total loan including short and long) + (long term load interest rate x long term loan amount divided by the sum of total loan)
Let A be the Weighted average interest rate.
So,
A = (10 * $1,960,000/($1,960,000 + $1,400,0000) + ($11% * $1,400,000/($1,960,000 + $1,400,0000)
)
A = 48.61%
Now, we just have to put in the values to find out the avoidable interest.
Let Avoidable interest = AI
AI = ($2,800,000 x 0.12) + ($2,240,000 x 0.4861)
AI = $1,424,864
Hence, the avoidable interest for the Monty's project is $1,424,864.
