Question

Sanders Co. is planning to finance an expansion of its operations by borrowing $46,600. City Bank has agreed to loan Sanders the funds. Sanders has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $4,660 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 9 percent for each option. Required a. What amount of interest will Sanders pay in Year 1 under option 1 and under option 2? (Round your final answers to the nearest dollar amount.) Amount of Interest Under option 1 Under option 2 b. What amount of interest will Sanders pay in Year 2 under option 1 and under option 2? (Round your final answers to the nearest dollar amount.) Amount of Interest Under option 1 Under option 2

Answer 1

a Calculation of amount of Interest Borrowing amount $ 46,600 Interest rate 9% First Year interest Under option 1 Under option 2 $ 46600 * 9% = 4194 $ 46600 * 9% = 4194 b Calculation of amount of Interest in 2 year Under option 1 there is no change in principal amount, but in option 2 principal amount will change Principal amount = $ 46600 -4660 41940 Under option 1 Under option 2 $ 46600 * 9% = 4194 $ 41940 * 9% = 3774.6 с Option 2 is more advantages to Sanders Co. since every year interest will save but option 1 sanders co. have to pay interest (fixed), so there is a loss in interest

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