You currently have $25,000 in the bank, in a savings account that draws 5% interest. Your business needs $25,000, and you are considering two options: (a) Use the money in your savings account. (b) Borrow the money from the bank at 6%, leaving the money in the savings account.

Your financial analyst suggests that solution (b) above is better. His logic: The sum of the interest paid on the 6% loan is lower than the interest earned at the same time on the $25,000 deposit. His calculations are illustrated below. Show that this logic is wrong. (If you think about it, it couldn?t be preferable to take a 6% loan when you are getting 5% interest from the bank. However, the explanation for this may not be trivial.)

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EXERCISE 14, financial analyst's calculations 2 Interest earned 3 Interest paid 4 Initial deposit 5% 6% 25,000 =PMT(SB$3,2,-SB$4) THE 6% LOAN Principal at beginning of year Payment at end of year Repayment of principal Anterest paid Year 25,000.00 12,864.08 Total interest paid 1,500.00 771.84 2,271.84 13,635.92 13,635.92 12,135.92|<- =C8-D8 12,864.08 10 11 Savings Account In savings 12 End-year In account at end of year Year account at interest beginning of year 25,000.00| 26,250.00 Interest earned earned 13 1,250.00 1,312.50 2,562.50 26,250.00 27,562.50 14 15 16