Biochemical Corp. requires $640,000 in financing over the next three years. The
ID: 2693441 • Letter: B
Question
Biochemical Corp. requires $640,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.75 percent interest in the first year, 13.25 percent interest in the second year, and 10.15 percent interest in the third year. (a) Determine the total interest cost under each plan. (Omit the "$" sign in your response.) Interest cost Fixed cost financing $ Variable short-term financing $Explanation / Answer
------------------------------------BIOCHEMICAL CORP .---------------------------------------------
----------------------COST OF THREE YEAR FIXED COST FINANCING------------------------------$640,000*10.6% Per annum *3 years =$203,520
---------------------Cost of Three Year Variable Short-term Financing------------------------
1st year $640,000 *8.75% Per annum = $56,000 Interest cost
2nd year $640,000*13.25% Per annum = $84,800 Interest cost
3rd year $640,000*10.15% Per annum = $64,960 Interest cost
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3-Year Total-------------------------------$205,760
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