Question

Boatler Used Cadillac Co. requires $800,000 in financing over the next two years. The firm can borrow the funds for two years at 9 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 6.75 percent interest in the first year and 10.55 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly?

Answer 1

Answer:

Plan1=$144000 Plan2= $138400

Plan two is  lower than plan 1 interest so it is the better plan

Explanation:

First option

$800000×0.09 =72000

So for two years

$72000×2=$144000

Second option

first year

800000×0.0675=$54000

second year

800000×0.1055=$84400

adding the two

$54000+$84400

=$138400

Plan two is  lower than plan 1 interest so it is the better plan

Answer 2

Answer:

Explanation:

Amount required   800000

   

Plan-1   9% per Annum

   

Year -1 800000 9% 72000

Year -2 800000 9% 72000

Total interest  144000

   

Plan-2    

   

Year -1 800000 6.75% 54000

Year -2 800000 10.55% 84400

Total interest  138400

   

Interset cost    

   

Plan-1   144000

Plan-2   138400

   

Plan 2 is more benificial because interest cost is lesser than plan-1