Question

Biochemical Corp. requires $670,000 in financing over the next three years. The firm can borrow the funds for three years at 12.90 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 9.75 percent interest in the first year 14.50 percent interest in the second year, and 10.90 percent interest in the third year. Assume interest is paid in full at the end of each year, 

a. Determine the total interest cost under each plan 

b. Which plan is less costly? 

• Long-term fixed-rate plan 

• Short-term variable-rate plan

Answer 1

a. Interest Cost
Long-term fixed rate = $670000 x 12.90% x 3 = $259,290
Short-term Variable rate = $670000 x 9.75% + 670000 x 14.50% + 670000 x 10.90% = $235,505

b.
Short-term Variable rate is less costly

If you have any query, kindly comment with your query and please mark thumbs up.