If interest on drawings is charged at lets say 10% per annum and david made his drawings (monthly) which amounted to a total of $50000 for the year. How much is he going to pay as interest on drawings?
Attempt:
I'm reading applications of mathematics to finance. This question is a bit confusing. Should I just calculate 10% of 50000 for the whole year or I have to calculate it monthly?
Thanks
Either it is as your attempt or they make the assumption that an equal amount is withdrawn each time and that the interval between two withdrawals also is equal. In this case interest on drawings is calculated with the monthly drawings method.
Here you have three common cases. When the dates are not given you usually use the average method, and the other cases is if the withdrawals are made at the end of the months or at the beginning of the months.
Using the average formula the amount he is going to pay as interest on drawings is
$$I_a = \text{Total drawings} \times \frac{\text{Rate}}{100} \times \frac{6}{12}$$
If it is in the end of every month the amount he is going to pay as interest on drawings is
$$I_e = \text{Total drawings} \times \frac{\text{Rate}}{100} \times \frac{5.5}{12}$$
And finally at the beginning of each month
$$I_b = \text{Total drawings} \times \frac{\text{Rate}}{100} \times \frac{6.5}{12}$$