A security firm is offered $80 000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74 000, payable now. If the security firm planned to borrow the funds from a bank, what is the maximum interest rate a bank could charge them so they at least break even on this project?
A)8.2155%
B)8.1081%
C)7.5000%
D)8.1999%

Question

Quizplus · Accepted Answer

To break even, the security firm must make at least $6,000 in profit, which is the difference between the revenue and the cost. Let r be the annual interest rate the security firm would pay on a loan for $74,000. Then, the amount of money the security firm would need to repay at the end of the year is:
$74,000 + $74,000r
To break even, this amount must be equal to the revenue of $80,000:
$74,000 + $74,000r = $80,000
Solving for r, we get:
r = (80,000 - 74,000) / 74,000 = 0.081081 or 8.1081%
Therefore, the maximum interest rate a bank could charge them and still break even on this project is 8.1081%. Choice B is correct.

A Security Firm Is Offered $80 000 in One Year