Dinpa Supermarket is considering acquiring a loan of GH₵300,000 from Abrempong Bank Ltd. The loan is payable in five equal annual instalments at an interest rate of 25%. Dinpa Ltd has consulted you to determine their annual repayment amount and the interest thereon.
Required:
i. Prepare a repayment schedule for Dinpa indicating clearly the interest payment and the principal repayment. (8 marks)
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Loan Amount (C) 300,000
Interest rate (r) 25%
No. of years (n) 5
Annuity (DF) 2.68928 or 2.689
Annual Instalment 111,554.02
ii. State THREE (3) advantages of a term loan over an overdraft facility. (3 marks)
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- Interest charged is not predictable, as it depends on a variable interest rate and on the amount overdrawn on each day of the charging period.
- The lender may not grant the entire amount requested, as changing financial situation of the business will be taken into consideration.
- Overdrafts are repayable on demand, which may occur at a time when management are not ready.
- Company may be forced to convert a hardcore overdraft into a loan term which can affect capital structure especially where the preference for overdraft was for managing the capital structure.
- Management will need to spend time strictly monitoring their accounts to ensure they operate within the overdraft limit.
- Time will need to be spent preparing management accounts and monitoring compliance with covenants