A ceramics producer is considering borrowing the full cost of a new kiln. The producer expects the kiln to generate the same additional profit in each year.
| Information | Amount |
|---|---|
| Loan required | £90,000 |
| Expected additional profit in the first year before interest | £5,400 |
| Original annual interest rate | 7% |
| New annual interest rate | 4% |
Calculate the producer's expected profit after deducting the first year's interest cost at the original interest rate and at the new interest rate.
Using your calculations, explain why the fall in the interest rate may encourage the producer to invest in the kiln.
82 exam-style questions on OCR GCSE Economics 2.8 The role of money and financial markets, covering 2.8.1 Money as a medium of exchange, 2.8.2 Role of the financial sector, 2.8.3 Importance of the financial sector, 2.8.4 Interest rates and saving, borrowing, investment, and 2.8.5 Effect of interest rate changes. Each one has a worked solution and a mark scheme showing where the marks go.