Multiple choice

Ms. Debjani after her MBA graduation wants to have start-up of her own. For this, she uses Rs. 8,00,000 of her own savings and borrows Rs. 12,00,000 from a public sector bank under MUDRA Scheme. As per the agreement with the bank, she is supposed to repay the principal of this loan equally over the period of the loan which is 25 years. Two years after taking the first loan, she borrowed an additional loan of Rs. 8,00,000 to finance expansion of her start-up. If Ms Debjani clears all her loans in 25 years from the date of taking the first loan, how much total interest she has to pay on her initial borrowing? Assume simple interest rate at 8 per cent per annum.

  1. Rs. 12,48,000

  2. Rs. 12,84,000

  3. Rs. 14,20,000

  4. Rs. 12,96,000
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The initial loan of 12,00,000 is repaid over 25 years, meaning 48,000 is paid back annually. The interest is calculated on the remaining principal each year. For the first 2 years, interest is on 12,00,000 (96,000 per year). After 2 years, the principal is 11,04,000, and interest is calculated on the remaining balance until the end of the term. Summing these annual interest payments results in 12,48,000.

AI explanation

The principal of 12,00,000 is repaid equally over 25 years, meaning 48,000 is repaid each year. Under simple interest, the interest is calculated on the outstanding principal, which decreases linearly from 12,00,000 in year 1 to 48,000 in year 25. The total interest paid is 8% of the sum of an arithmetic progression from 12,00,000 to 48,000 with 25 terms. The average principal over the period is (1200000 + 48000) / 2 = 624000, making the total interest 624000 * 0.08 * 25 = 12,48,000.

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