A company borrows 5mil for a construction project @12% then invest the whole amount @11% until payments are due. During the year it incurs cost of 4mil evenly for the project. How much interest revenue would it recognize?
To determine the interest revenue, we need to calculate the interest earned on the borrowed amount and the interest earned on the invested amount separately.
First, let's calculate the interest expense on the borrowed amount:
Interest Expense = Principal Amount × Interest Rate = $5,000,000 × 12% = $600,000
Next, we need to calculate the interest earned on the invested amount:
Investment Income = Principal Amount × Interest Rate = $5,000,000 × 11% = $550,000
Now, we need to consider the cost incurred for the project. The cost of $4 million is evenly spread over the year. So, we need to adjust the interest revenue based on the project cost.
Adjusted Interest Revenue = Investment Income - Cost Incurred
Adjusted Interest Revenue = $550,000 - $4,000,000 = -$3,450,000
Therefore, the company would recognize an adjusted interest revenue of -$3,450,000. It's negative because the interest earned on the invested amount is lower than the interest expense on the borrowed amount after adjusting for the project cost.