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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Sunrise Textiles Ltd raised a term loan of Rs 60,00,000 repayable in 5 equal annual instalments of principal at the end of each year, with interest at 10% p.a. on the outstanding balance at the start of each year. What is the total interest payable in the third year?

The interest in year three is Rs 3,60,000. Each year Rs 12,00,000 of principal is repaid, so after two years the outstanding balance is Rs 36,00,000, and 10% of that balance gives the third-year interest.

  1. ARs 3,60,000Correct
  2. BRs 2,40,000
  3. CRs 4,80,000
  4. DRs 1,20,000

Explanation

Annual principal repayment is 60,00,000/5 = Rs 12,00,000. At the start of year 3, two instalments have been repaid, so the outstanding balance is 60,00,000 - 24,00,000 = Rs 36,00,000. Interest is 10% of 36,00,000 = Rs 3,60,000. Rs 4,80,000 is the interest for year 2, on the 48,00,000 balance.

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