Miller Co. is planning to finance an expansion of its operations by borrowing $200,000. State Bank has agreed to loan Miller the funds. Miller 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 $20,000 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 6 percent for each option.

Required

a. What amount of interest will Miller pay in year 1

(1) Under option 1?

(2) Under option 2?

b. What amount of interest will Miller pay in year 2

(1) Under option 1?

(2) Under option 2?

c. Explain the advantage of each option.