The production of polyamide from raw materials of plant origin, such as castor oil, requires 20% less fossil fuel than conventional production methods. Darvon Chemicals borrowed $6 million to implement the process. If the interest rate on the loan is 10% per year (on an unrecovered balance) for 10 years, what is the amount of interest for year 2?
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To calculate the interest for year 2 on a loan with an annual interest rate of 10% on the unrecovered balance, we first need to determine the unrecovered balance at the beginning of year2.
The interest on the loan is compounded annually, and each year, the interest is calculated based on the remaining balance from the previous year.
At the start of year 1, the borrowed amount was $6 million. The interest for year 1 would be 10% of $6 million, which is $600,000. So, at the end of year 1,
the remaining balance after paying interest would be $6 million (initial loan) + $600,000 (interest for year 1) = $6,600,000.
For year 2, the interest would be calculated on this remaining balance of $6,600,000. The formula to calculate simple interest is Interest = Principal × Rate. Here, the principal is $6,600,000 and the rate is 10%.
Interest = $6,600,000, times 0.10 = $660,000
Therefore, the amount of interest for year 2 on the loan would be $660,000.