Loni owns a software company and has a great idea for a new app. In order to build the app, she will need to hire a computer expert for one year at a salary of $87,000. (Assume this is the only expense required to create this app.) However, she expects to make $99,000 by selling the app. Since Loni does not have any extra cash on hand, she goes to the bank, where they offer to lend her $87,000 with an annual interest rate of 15%. Should Loni take the loan and build the app?

Question

Business

Tessa Flynn

23 August, 13:13

Loni owns a software company and has a great idea for a new app. In order to build the app, she will need to hire a computer expert for one year at a salary of $87,000. (Assume this is the only expense required to create this app.) However, she expects to make $99,000 by selling the app. Since Loni does not have any extra cash on hand, she goes to the bank, where they offer to lend her $87,000 with an annual interest rate of 15%. Should Loni take the loan and build the app?

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Ashley Combs · Answer 1

No, Loni should not take the loan and build the app.

Explanation:

If she borrows $87,000 to build the app, at the end of the year she will have to pay $87,000 x (1+0.15) = 100,050 in principal and interest to the bank.

After selling the app she will get 99,000 - 100,050 = $1,050.

In other words, she will be making a loss.