Stern Educational TV, Inc., has decided to buy a new computer system with an exp

Question

Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $310,000. The company can borrow $310,000 for three years at 13 percent annual interest or for one year at 11 percent annual interest. (a) How much would the firm save in interest over the three-year life of the computer system if the one-year loan is utilized, and the loan is rolled over (reborrowed) each year at the same 11 percent rate? Compare this to the 13 percent three-year loan. Amount 11 Percent 13 Percent Interest saving (b) What if interest rates on the 11 percent loan go up to 16 percent in the second year and 19 percent in the third year? What would be the total interest cost compared to the 13 percent, three-year loan? Amount 1st year 2nd year 3rd year Extra interest cost

Explanation / Answer

Solution Problem 6-7 Instructions Complete the tables below with data and formulas.

Stern Educational TV, Inc.

If Rates Are Constant: Amount Borrowed 3-year loan $200,000

1-year loan $200,000 Interest savings of 1-year "rollover" loan Rate 12% Years 3 Rate Interest

If Short-term

total interest Amount Borrowed

Year 1 ----------$200,000

Year 2 -------$200,000

Year 3=============$200,000

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