Boater Used Cadillac Co. requires $1,020,000 in financing over the next two year

Question

Boater Used Cadillac Co. requires $1,020,000 in financing over the next two years. The firm can borrow the funds for two years at 8 per cent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 5.75 per cent interest in the first year and 10.55 per cent interest in the second year. Assume interest is paid in full at the end of each year. Determine the total two-year interest cost under each plan. Which plan is less costly? Short-term variable-rate plan Long-term fixed-rate plan

Explanation / Answer

a Year 1 Year 2 Total Interest Cost Details Principal Amt $ Interest Rate % Interest Amt $ Interest Rate % Interest Amt $ Long term fixed Rate Loan    1,020,000 8.00%      81,600 8.00%      81,600    163,200 Short term variable Rate    1,020,000 5.75%      58,650 10.55%    107,610    166,260 Total Interest cost b so Long term fixed rate loan is less costly

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