Question

Riley Co. is considering a short-term or long-term financing plan of $4,000,000 assets. It expects the following one-year interest rates over the next three years: 6.5%, 7.75%, and 9%. The long-term interest rate will be 7.5% during those three years. What will be the difference in interest costs over the three years?

Answer 1

What will be the difference in interest costs over the three years?

-$30.000 The Long-Term investment it's cheaper than the Short-Term, the interest rate it's -0,8% lower.

Step-by-step explanation:

Investment YEAR 1 YEAR 2 YEAR 3 TOTAL

$4,000,000

Long Term 7,50% 7,50% 7,50% 22,5%

Long Term $300,000 $300,000 $300,000 $900,000

Short-Term 6,50% 7,75% 9,00% 23,3%

Short-Term $260,000 $310,000 $360,000 $930,000

DIFFERENCE -$30.000 -0,8%