Sauer Food Company has decided to buy a new computer system with an expected lif

Question

Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $370,000. The company can borrow $370,000 for three years at 11 percent annual interest or for one year at 9 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 9 percent rate? Compare this to the 11 percent three-year loan. Interest 9 percent loan 11 percent loan Interest savings 99,900 $ 122,100 22,200 b. What if interest rates on the 9 percent loan go up to 14 percent in year 2 and 17 percent in year 3? What would be the total interest cost compared to the 11 percent, three-year loan? Interest $122,100 Fixed-rate 11% loan Variable-rate loan Additional interest cost 1:06 AM O Type here to search 22018

Explanation / Answer

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 9 percent rate? Compare this to the 11 percent three-year loan. Interest on 9% loan = $370,000 x 11% x 3 years $99,900.00 Interest on 11% loan = $370,000 x 9% x 3 years $122,100.00 Interest Savings $22,200.00 b. What if interest rates on the 9 percent loan go up to 14 percent in year 2 and 17 percent in year 3? What would be the total interest cost compared to the 11 percent, three-year loan? Interest on 11% loan = $370,000 x 9% x 3 years $122,100.00 Variable Rate Loan = $370,000 x 9% + $370000 x 14% + $370000 x 17% $148,000.00 Additional interest Cost $25,900.00

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