Biochemical Corp. requires $700,000 in financing over the next three years. The
ID: 2339252 • Letter: B
Question
Biochemical Corp. requires $700,000 in financing over the next three years. The firm can borrow the funds fo that if she utilizes short-term financing instead, she will pay 7.75 percent interest in the first year, 12.50 percent interest in the second year, and 8.75 percent interest in the third year. Assume interest is paid r three years at 10.90 percent interest per year. The CEO decides to do a forecast and predicts in full at the end of each year. a. Determine the total interest cost under each plan. Interest Cost Long-term fixed-rate Short-term variable-rate b. Which plan is less costly? Short-term variable-rate plan Long-term fixed-rate planExplanation / Answer
Answer
Long term Fixed Rate
Interest rate = 10.9%
Total Interest for 3 Years = Loan Amount * Interest Rate * Time
= $700,000 * 10.9% * 3 Years
Total Interest for 3 Years under Long term Fixed Rate = $228,900
Short term Fixed Rate
Interest rate for 1st year = 7.75%
2nd year = 12.5%
3rd year = 8.75%
Total Interest for 3 Years = (Loan Amount * Interest Rate for 1st year) + (Loan Amount * Interest Rate for 2nd year) + (Loan Amount * Interest Rate for 3rd year)
= ($700,000 * 7.75%) + ($700,000 * 12.5%) + ($700,000 * 8.75%)
Total Interest for 3 Years under Short term Fixed Rate = $203,000
b.
Short Term financing is less costly.
Dear Student, if u have any doubt, plz feel free to reach me.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.