Business Studies – 5.4.1 The main elements of a statement of financial position | e-Consult
5.4.1 The main elements of a statement of financial position (1 questions)
Calculation:
Annual Interest = £50,000 * 8% = £4,000
Total Interest Paid over 5 years = £4,000 * 5 = £20,000
Total Cost of the Loan = Loan Amount + Total Interest = £50,000 + £20,000 = £70,000
What the Total Cost Represents: The total cost of the loan (£70,000) represents the total amount the business will have to pay back to the bank over the 5-year repayment period. This includes the original loan amount plus all the interest accrued during the loan term.
In terms of profitability: The total cost of the loan reduces the business's profitability. The business has to allocate a portion of its revenue to cover the interest payments, which reduces the amount of profit available for other uses, such as reinvestment, dividends, or owner's draw. The business needs to ensure that its projected future profits are sufficient to cover the loan repayments and interest, otherwise it could face financial difficulties. A high total cost of the loan can significantly impact the business's overall financial performance and its ability to grow.