I have an answer, and I need to verify it\'s correct. Question: Sauer Food Co. h

Question

I have an answer, and I need to verify it's correct.

Question:

Sauer Food Co. has decided to buy a new computer system with an expected life of 3 years. The cost is $150,000. The company can borrow $150,000 for 3 years at 10% annual interest or for 1 year at 8% annual interest.
How much would Sauer Food Co. save in interest over the 3 year life of the computer system if the 1 year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8% rate? Compare this to the 10% 3 year loan.
What if interest rates on the 8% loan go up to 13% in year 2 and 18% in year 3? What would be the total interest cost compared to the 10%, 3 year loan?

I got 2 separate answers:
1. They will save $9,000 if they go with the 8% (the one that stays 8% all 3 years
2. The total interest cost for the second part of the question is, $58,500

Explanation / Answer

If Rates Are Constant $150,000 borrowed x 8% per annum x 3 years = $36,000 interest cost $150,000 borrowed x 10% per annum x 3 years = $45,000 interest cost $45,000 – $36,000 = $9,000 interest savings borrowing short-term If Short-term Rates Change 1st year $150,000 x .08 = $12,000 2nd year $150,000 x .13 = $19,500 3rd year $150,000 x .18 = $27,000 Total = $58,500 $58,500 – $45,000 = $13,500 extra interest costs borrowing short-term.

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