# Find the cost of loan in the given cases.

Problem 1

Blake Company has 3400 hourly workers. They work 40 hours a week, at the rate of $7.00 an hour, and they are paid every Friday. The company has decided to pay them twice a month. The cost of printing and processing each check is $1.25. The cost of capital to the company is 14%. Find the present value of the annual savings created by this decision. Find the value added to the company by this procedure.

Problem 2

Chatterton Company has obtained a $75,000 short-term loan from the bank with the understanding that Chatterton will repay the loan in two equal monthly installments of $38,250 each. The first installment is due after 30 days, and the second after 60 days. Find the cost of this loan for Chatterton.

Problem 3

(A) De la Mare Company has $140,000 in accounts receivable that will be collected within 75 days. Since de la Mare needs cash immediately, it has decided to factor them and has received $130,000. Find the cost of this loan for de la Mare.

(B) Donne Factoring Company, who took the receivables, actually was able to collect only $135,000 after 90 days. Find the rate of return on this investment for Donne.

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#### Solution Preview

See the attached file.

7.1. Blake Company has 3400 hourly workers. They work 40 hours a week, at the rate of $7.00 an hour, and they are paid every Friday. The company has decided to pay them twice a month. The cost of printing and processing each check is $1.25. The cost of capital to the company is 14%. Find the present value of the annual savings created by this decision. Find the value added to the company by this procedure.

Annual Cost of labor=3400*40*7*52=$49504000

Weekly cost of labor=49504000/52=$952000

Check printing and processing cost per week=3400*1.25=$4250

Weekly Cost=C=952000+4250=$956250

Cost of capital=r=14%/52 weekly

Number of payments=n=52

PV of weekly payments is given by

Now let us calculate ...

#### Solution Summary

There are 3 problems. Solution to first problem depicts the steps to estimate the value to the company if wages are paid bi-monthly. Solution to other problems depict the steps to estimate the cost of loan in the given cases.