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 or

(b) borrow the money from the bank at 6%, leaving the money in the savings account.
Your financial analyst suggests that solution

(b) is better. The 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. The 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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2 Interest eamed 3 Interest paid 4 Initial deposit 5 6 A E F B C D EXERCISE 14, financial analyst's calculations 5% 6% 25,000 THE 6% LOAN PMT(SBS3.2-SB54) Principal at Payment at Repayment Year Interest paid 7 beginning of year end of year of principal 8 1 25.000.00 13,635.92 1,500.00 12,135.92C8-08 9 2 12.864.08 13,635.92 771.84 12.864.08 10 Total interest paid 2.271.84 11 12 Year 13 14 15 16 Savings Account In savings End-year account at interest beginning of year earned In account at end of year 1 25.000.00 1,250.00 26,250.00 26.250.00 1,312.50 27,562 50 Interest earned 2.562.50