$10$

Problem $6-9($Algo$)$ Short$-$term versus longer$-$term borrowing $[$LO$6-3]$

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.

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?