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Hi My Dear Tutor, I have question relating to borrowing cost from opentuition’s notes.
Edigijus has arranged a loan with Swedbank to enable him to build a new football stadium in Vilnius. He will be allowed to borrow up to $300,000,000 to be used in such amounts and at such times as he requires the funds. The bank charges interest at the rate of 7% per annum, and Edigijus is able to invest any surplus funds at the rate of 5% per annum.
He borrowed $100,000,000 on 1 January 2008, and immediately invested $50,000,000. On 28 February he withdrew $30,000,000. On 1 April he borrowed a further $120,000,000 of which he invested $70,000,000. On 31 May, he spent $60,000,000. On 31 August he borrowed a further $80,000,000 and spent $20,000,000 immediately. On 1 November work was stopped because of a strike by the workforce. The work recommenced on 1 January, 2009, and Edigijus spent the rest of the loan in completing the project, which was ready for final inspection by 28 February. The local authority finally gave their approval of the stadium on 1 April, and paid Edigijus the full contract price of $350,000,000.
Solution.
Date———————–cumulative borrowing—————invested————spent
January————————100————————————–50——————20
February—————-no further borrowing cost—————–20—————30
April———————220(further borrowing 120)—————90—————50
May—————————no borrowing cost taken—————30————60
September———————300————————————-90————-20
Why we invest 20 in February and spent 30 there is no investment in february, I will gonna understand investment of 90 if 20 is invested in February?Why we spent 50 in April?the solution goes on looks like confuse me too much.I can catch some parts and simultaneously can not catch some part.Need very good explanation.
Thank you very much.“Why we invest 20 in February and spent 30 there is no investment in february”
Because we invested 50 in January and now we have spent 30 of that 50 so all we have left in investments is 20
“I will gonna understand investment of 90 if 20 is invested in February?”
I don’t understand you, sorry (incidentally ‘gonna’ is not an English word. I believe that you mean ‘going to’)
“Why we spent 50 in April?”
We borrowed 120 more in April and spent 50 of that 120. So we were able to invest 70 of that 120. But we already had 20 invested so this additional 70 now takes our investments up to 90
Are you getting the hang of it now?
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