Question

You are saving for a trip to Europe. You have an existing savings account that earns 3 percent annual interest and has a current balance of $4,200. You don't want to use your current savings for vacation, so you decide to borrow the $1,600 you need for travel expenses. You will repay the loan in exactly one year. The annual interest rate is 6 percent. Instructions: Enter your answers as a whole number a. If you were to withdraw the $1,600 from your savings account to finance the trip, how much interest would you forgo? $ 96 b. If you borrow the $1,600 how much will you pay in interest? c. How much does the trip cost you if you borrow rather than dip into your savings? $ 1696

Answer 1

In this question, by using the given information I have find the Forgone interest, Interest on Borrowed amount and the Trip Cost..

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$48 (c) Total Cost includes implicit cost and explicit cost. Implicit Cost Forgone Interest Explicit Cost Borrowed Amount + Interest on borrowed amount $1,600 + $96 $1,696 Trip Cost Explicit Cost - Implicit Cost $1,696 - $48 - So, the trip cost if you borrow rather than dip into your savings is $1,648