Biochemical Corp requires $660 000 n financing over the next three years. The fi

Question

Biochemical Corp requires $660 000 n financing over the next three years. The firm can borrow the unds three years at 12.8 e centinteres er ear. The CE? decides to io a forecast and predicts that if she utilizes short-term financing instead, she will pay 9.50 percent interest in the first year, 14.25 percent interest in the second year, and 10.75 percent interest in the third year. Assume interest is paid 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 plan

Explanation / Answer

Answer a. Interest Expense - Long Term Fixed Rate = $660,000 X 12.80% X 3 Years Interest Expense - Long Term Fixed Rate = $253,440 Interest Expense - Short Term Variable Rate I Year = $660,000 X 9.50% = $62,700 II Year = $660,000 X 14.25% = $94,050 III Year = $660,000 X 10.75% = $70,950 Interest Expense - Short Term Variable Rate = $62,700 + $94,050 + $70,950 Interest Expense - Short Term Variable Rate = $227,700 Answer b. Short Term Variable Rate Plan

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