Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2014 and completed construction of the ship on October 31, 2015. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2014. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:
$$\begin{array} { r r }
\text { Date } & \text { Amount } \
2 / 1 / 2014 & \$ 1,050,000 \
3 / 31 / 2014 & 900,000 \
6 / 1 / 2014 & 750,000 \
10 / 1 / 2014 & 1,000,000 \
12 / 31 / 2014 & 600,000 \
3 / 1 / 2015 & 900,000 \
9 / 1 / 2015 & 250,000
\end{array}$$
-What would be the amount of Doggy's cumulative weighted average expenditure during 2015 related to the cutter project?

Question

Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2014 and completed construction of the ship on October 31, 2015. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2014. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:
$$\begin{array} { r r } 
\text { Date } & \text { Amount } \
2 / 1 / 2014 & \$ 1,050,000 \
3 / 31 / 2014 & 900,000 \
6 / 1 / 2014 & 750,000 \
10 / 1 / 2014 & 1,000,000 \
12 / 31 / 2014 & 600,000 \
3 / 1 / 2015 & 900,000 \
9 / 1 / 2015 & 250,000
\end{array}$$
-What would be the amount of Doggy's cumulative weighted average expenditure during 2015 related to the cutter project?

Quizplus · Accepted Answer

To calculate the cumulative weighted average expenditure for 2015, we consider the expenditures from 2014 that carry over into 2015 and the new expenditures in 2015. The weighted average is calculated by multiplying each expenditure by the fraction of the year it was outstanding. The calculation is as follows:  - 2014 expenditures carried into 2015:    - $1,050,000 from 2/1/2014 for 12 months in 2015: $1,050,000    - $900,000 from 3/31/2014 for 12 months in 2015: $900,000    - $750,000 from 6/1/2014 for 12 months in 2015: $750,000    - $1,000,000 from 10/1/2014 for 12 months in 2015: $1,000,000    - $600,000 from 12/31/2014 for 12 months in 2015: $600,000  - 2015 expenditures:    - $900,000 from 3/1/2015 for 10 months in 2015: $750,000    - $250,000 from 9/1/2015 for 2 months in 2015: $41,667  Adding these gives a total weighted average expenditure of $4,341,250.

Doggy Co Began Construction of a New Cutter for the U