Question

Biochemical Corp. requires $720,000 in financing over the next three years. The firm can borrow the funds for three years at 10.20 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.50 percent interest in the first year, 12.90 percent interest in the second year, and 9.75 percent interest in the third year. Assume interest is paid in full at the end of each year. a. Determine the total interest cost under each plan.

Answer 1

Determine the total interest cost under each plan.

Plan 1 220320

Plan 2 224280

Step-by-step explanation:

FIRST

F = P ( 1 + i * n )

F=720000(1+10,20%*3) 940320

F=940320

Interest=940320-720000 220320

Interest 1= 220320

SECOND

F = P ( 1 + i * n )

Interest 2

F=720000(1+8,5%*1) 781200 720000 61200

F=720000(1+12,9%*1) 812880 720000 92880

F=720000(1+9,75%*1) 790200 720000 70200

224280