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 $240,000. The company can borrow $240,000 for three years at 14 percent annual interest or for one year at 12 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 12 percent rate? Compare this to the 14 percent three-year loan.
12 percent loan =

14 percent loan =

Interests Savings =

b. What if interest rates on the 12 percent loan go up to 18 percent in year 2 and 21 percent in year 3? What would be the total interest cost compared to the 14 percent, three-year loan?

Fixed-rate 14% loan =

Variable rate loan =

Additional Interest cost =
  

Explanation / Answer

a Interest rate is constant 12 percent loan Interest payment $240000*12%*3 $ 86400 14 percent loan Interest payment $240000*14%*3 $ 100800 Interest Savings $ 14400 b Fixed- Rate 14% loan Interest payment $240000*14%*3 $ 100800 Variable Rate $240000*12% $ 28800 $240000*18% $ 43200 $240000*21% $ 50400 Total $ 122400 Additional Interest costs $ 21600

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