Problem 6-9 Short-term versus longer-term borrowing [40] Saver Food Company has decided to buy a new...

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Problem 6-9 Short-term versus longer-term borrowing [40] Saver Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 esssets annual interessor for one year at 8 percent annual interest. Assume interest is paid in 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) eachy the same & percent rate? Compare this to the 10 percent three-year loan b. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 year 3? What would be the total interest cost compared to the 10 percent Input variables Number of years Cost 3 years $150,000 3-year Interest rate 008 a-Years 2-3 interest rate 0.08 b. Year 2 interest rate 0.13 b. Year 3 interest rate 018 Solution and Explanation: Interest for 3 years 1-yr rate $36,000 Interest for 3 years $45,000 Interest savings $9,000 b. Interest for 3 years variable rate Interest-Year 1 Interest-Year 2 Interest-Year 3 Total variable-rate interest Extra interest Problem 6-9 Short-term versus longer-term borrowing [40] Saver Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 esssets annual interessor for one year at 8 percent annual interest. Assume interest is paid in 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) eachy the same & percent rate? Compare this to the 10 percent three-year loan b. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 year 3? What would be the total interest cost compared to the 10 percent Input variables Number of years Cost 3 years $150,000 3-year Interest rate 008 a-Years 2-3 interest rate 0.08 b. Year 2 interest rate 0.13 b. Year 3 interest rate 018 Solution and Explanation: Interest for 3 years 1-yr rate $36,000 Interest for 3 years $45,000 Interest savings $9,000 b. Interest for 3 years variable rate Interest-Year 1 Interest-Year 2 Interest-Year 3 Total variable-rate interest Extra interest