Question

Anil’s Computer Services is expecting to expand. It needs $2,000,000 financing over the next two years. It can borrow the total for two years at 5.5% interest or it can borrow short term by paying 4.5% the first year and 8.0% the second year. (1) What is the total cost of borrowing under each of the two plans? (2) Which plan is less costly?

Answer 1

Ans
1		Anil’s Computer Services
		Plan 1	Plan2	Diff
	Borrowed money	$                                            20,00,000.00	$ 20,00,000.00
	Interest Rate	5.50%	4.50%
	1 year	$                                               1,10,000.00	$       90,000.00
	Interest Rate	5.50%	8%
	2 year	$                                               1,10,000.00	$    1,60,000.00
	Total Interest paid	$                                               2,20,000.00	$    2,50,000.00	$ -30,000.00
		Note	Interest Rate is Simple
2	as per above calculation plan 2 is costly