Sauer Food Company has decided to buy a new computer system with an expected lif
ID: 2664935 • Letter: S
Question
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.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 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would the total interest cost compared to the 10 percent, three-year loan?
Explanation / Answer
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. 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 8 percent rate? Compare this to the 10 percent three-year loan. 8% per year interest for the 3 year period=150000*0.08*3=$36000 10% 3 year loan interest=150000(1+0.1)^3-150000=$49650 they would save 49650-36000=$13650 What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would the total interest cost compared to the 10 percent, three-year loan interest over the 3 year period= 150000*0.08+150000*0.13+150000*0.18=150000(0.39)= =$58500 the 3 year loan would now be the better alternative as the interest would be 58500-49650=$8850 less
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.