Question

Sanders Co. is planning to finance an expansion of its operations by borrowing $48,400. City Bank has agreed to loan Sanders the funds. Sanders has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $4,840 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 12 percent for each option.

What amount of interest will Sanders pay in year 1 under option 1 and under option 2?

Answer 1

Answer: Option 1 - $5,808

Option 2 - $5,808

Step-by-step explanation:

YEAR 1

Option 1

Expected to pay 12% in interest so that would be,

= 0.12 * 48,400

= $5,808

$5,808 is the amount to be paid in interest in the first year under option 1

Option 2

Expected to pay 12% interest on $48,400 as Principal has not been subtracted,

= 0.12 * 48,400

= $5,808

$5,808 is the amount to be paid in interest in the first year under option 2.