Question

Sauer Food Company has decided to buy a new computer system with an expected ife of three years. The cost is $360,000. The company can borrow $360,000 for three years at 14 percent annual interest or for one year at 12 percent annual interest. Assume interest is paid in full at the end of each year a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year the same 12 percent rate? Compare this to the 14 percent three-year loan, Interest 12 percent loan 14 percent loan Interest savings b. What if interest rates on the 12 percent loan go up to 18 percent in year 2 and 21 percent in year 37 What would be the total interest cost compared to the 14 percent, three-year loan? Interest Fixed-rate 14 % loan Variable-rate loan Addtional intorest cost

Answer 1

0-14 pucent interest - $360.000 x 19 - $ 50,400 100 -101 3 years - $151,200 - 12 percent interes - $360,000* 12 : $43,200 - tol gyenu = $ 43,200 x 3 = $ 129,600 112 Percent loan 14 percent loan Antesut Socorien Interest $ 129,600 $ 151,200 $21.600 (b) - variable -vat toon 1st year - $360,000+ 12 $43,200 2 nd you - $360,000* 18 : $ 64,80 0 100 - 3 yeau - $ 360.000 x 21 = $ 45,600 $ 193,600 Roxed uate-14% roulable uate loan Additional in COR Interet $151,200 $185,600 $ 32,400