Biochemical Corp. requires $650,000 in financing over the next three years. The

Q: Biochemical Corp. requires $650,000 in financing over the next three years. The

a). Cost of three year fixed cost financing = $650,000 borrowed x 12.60% p.a. x 3 years = $245,700 Cost of Three Year Variable Short-term Financing 1st Year : $650,000 x 9.25% = $60,125 2nd Year : $650,000 x 13.50% = $87,750 3rd Year : $650,000 x 11.50% = $74,750 Total 3-year cost = $222,625 b). The short-term plan is less costly.

ID: 2808242 • Letter: B

Question

Biochemical Corp. requires $650,000 in financing over the next three years. The firm can borrow the funds for three years at 12.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 9.25 percent interest in the first year, 13.50 percent interest in the second year, and 10.50 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.

b. Which plan is less costly?

Short-term variable-rate plan Long-term fixed-rate plan

Explanation / Answer

a). Cost of three year fixed cost financing

= $650,000 borrowed x 12.60% p.a. x 3 years = $245,700

Cost of Three Year Variable Short-term Financing

1st Year : $650,000 x 9.25% = $60,125

2nd Year : $650,000 x 13.50% = $87,750

3rd Year : $650,000 x 11.50% = $74,750

Total 3-year cost = $222,625

b). The short-term plan is less costly.

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Biochemical Corp. requires $640,000 in financing over the next three years. The

Biochemical Corp. requires $660,000 in financing over the next three years. The

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Biochemical Corp. requires $650,000 in financing over the next three years. The

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