Dodson Co. is planning to finance an expansion of its operations by borrowing $1

Question

Dodson Co. is planning to finance an expansion of its operations by borrowing $120,000. City Bank has agreed to loan Dodson the funds. Dodson has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $12,000 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 8 percent for each option. What amount of interest will Dodson pay in year 1? What amount of interest will Dodson pay in year 2?

Explanation / Answer

Answer: The amount of interest will Dodson pay in year 1 is:

under option 1: =120000*8%=9600

under option 2: 120000*8%=9600

The amount of interest will Dodson pay in year 2 is:

under option 1: =120000*8%=9600

under option 2: (120000-2400)*8%=9408

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