Question
In: Finance
Sauer Food Company has decided to buy a new computer system with an expected life of...
Sauer Food Company has decided to buy a new computer system with
an expected life of three years. The cost is $380,000. The company
can borrow $380,000 for three years at 12 percent annual interest
or for one year at 10 percent annual interest. Assume interest is
paid in full at the end of each year.
a. How much would Sauer Food Company 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 10 percent rate? Compare this to the 12 percent three-year
loan.
10% loan -
12% loan -
Interest Savings -
b. What if interest rates on the 10 percent loan go up to 15 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 12 percent, three-year loan?
Fixed 12% loan -
Variable Rate loan -
Additional Interest Cost -
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Problem 6-9 Short-term versus longer-term borrowing [LO3] Sauer Food Company has decided to buy a new...
Problem 6-9 Short-term versus longer-term borrowing
[LO3]
Sauer Food Company has decided to buy a new computer system with an
expected life of three years. The cost is $150,000. The company can
borrow $150,000 for three years at 10 percent annual interest or
for one year at 8 percent annual interest. Assume interest is paid
in full at the end of each year.
a. How much would Sauer Food Company save in interest
over the three-year life of the computer...
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