CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Private Funding
Kaveri Textiles Ltd takes a term loan of Rs 60 lakh, repayable in 4 equal annual principal instalments at the end of each year, with interest at 10% p.a. charged on the outstanding balance at the start of each year. What is the total interest paid over the loan life?
Total interest is Rs 15 lakh. Principal falls by Rs 15 lakh each year, so interest on opening balances is 6, 4.5, 3 and 1.5 lakh. Charging 10% on the full Rs 60 lakh for four years would wrongly give Rs 24 lakh.
- ARs 15 lakhCorrect
- BRs 24 lakh
- CRs 18 lakh
- DRs 12 lakh
Explanation
Principal repaid each year is Rs 15 lakh. Opening balances are 60, 45, 30 and 15 lakh. Interest is 6.0 + 4.5 + 3.0 + 1.5 = Rs 15 lakh. The figure of Rs 24 lakh results from charging interest on the full Rs 60 lakh for all 4 years, which ignores the repayments.
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