Bob set up Bob’s Musical Fun (BMF). BMF is a high street shop that sells only rare vinyl records. BMF also takes bookings for a number of local bands. The customer asks BMF for a band that plays a particular type of music and BMF finds a band that suits the request. Bob needs a loan to expand his business. As BMF is an established business, the bank agreed to a loan with an interest rate of 6.0%.
The bank has increased the interest rate on BMF’s existing loan from 6.0% to 8%. Identify ONE effect of this change on BMF.
Select ONE answer:
- Decreased net cash flow
- Increased variable costs
- Decreased fixed costs
- Increased profit
Show the workings to arrive at your answer, and explain and justify your reasons:
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This multiple choice question is suitable for Business Studies KS4 & KS3 classes
The answer is 1:
- Decreased net cash flow – is correct because the net cash flow would be affected due to higher cash outflows.
- Increased variable costs – is not correct because the interest rate on loans is a fixed cost.
- Decreased fixed costs – is not correct because an increase in interest rates will increase fixed costs.
- Increased profit – is incorrect because the profit will decrease.
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