Boatler Used Cadillac Co. requires $900,000 in financing over the next two years
ID: 2659517 • Letter: B
Question
Boatler Used Cadillac Co. requires $900,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 7.75 percent interest in the first year and 13.55 percent interest in the second year.
Determine the total two-year interest cost under each plan. (Omit the "$" sign in your response.)
(a)
Determine the total two-year interest cost under each plan. (Omit the "$" sign in your response.)
Explanation / Answer
l interest cost under fixed cost plan:
=Principal*Rate*time/100
=900000*12*2/100
=$216000
Total interest cost under variable cost plan
=(900000*7.75%*1/100)+(900000*13.55%*1/100)
=69750+121950
=191700
variable cost plan is less costly