Boatler Used Cadillac Co. requires $940,000 in financing over the next two years
ID: 2816333 • Letter: B
Question
Boatler Used Cadillac Co. requires $940,000 in financing over the next two years. The firm can borrow the funds for two years at 11 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 7.25 percent interest in the first year and 12.55 percent interest in the second year. Assume interest is paid in full at the end of each year.
a. Determine the total two-year interest cost under each plan.
b. Which plan is less costly?
Interest Cost Long-term Fixed-rate Short-term Fixed-rateExplanation / Answer
Answer: Since interest is paid in full at the end of each year, concept of compounding does not arise.
A.
B.
From above we can conclude, Short Term Variable Plan is less costly.
Long Term Fixed Rate Principal 940,000.00 Interest @11% for first year 103,400.00 Interest @11% for second year 103,400.00 Total Interest Cost 206,800.00 Short Term Variable Rate Principal 940,000.00 Interest @7.25% for first year 68,150.00 Interest @12.55% for second year 117,970.00 Total Interest Cost 186,120.00