Boatler Used Cadillac Co. requires $980,000 in financing over the next two years
ID: 2630826 • Letter: B
Question
Boatler Used Cadillac Co. requires $980,000 in financing over the next two years. The firm can borrow the funds for two years at 10 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 6.75 percent interest in the first year and 11.55 percent interest in the second year.
Determine the total two-year interest cost under each plan
Boatler Used Cadillac Co. requires $980,000 in financing over the next two years. The firm can borrow the funds for two years at 10 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 6.75 percent interest in the first year and 11.55 percent interest in the second year.
Explanation / Answer
Amount to be borrowed 980000 Plan I Year Interest cost Principal Oustanding 1 98,000.00 10,78,000.00 [980000*.10] 2 1,07,800.00 11,85,800.00 [1078000*.10] total interest cost 2,05,800.00 Plan II Year Interest cost Principal Oustanding 1 66,150.00 10,46,150.00 [980000*.0675] 2 1,20,830.33 11,66,980.33 [1046150*.1155] total interest cost 1,86,980.33 Interest cost is lower under plan I