Question

Sanders Co. is planning to finance an expansion of its operations by borrowing $49,200. 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 $4,920 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 9.5 percent for each option.
Required
a. What amount of interest will Sanders pay in year 1 under option 1 and under option 2?
Amount of Interest
Under option 1
Under option 2
b. Wihat anount of insyinyder option 1 and under option 27 (Round your final answers to the nearest dollar amount)
Amount of Interest
Under option 1
Under option 2
c. Which option is more advantageous to Sanders?
Option 1
Option 2

Answer 1

Answer:

Following are the responses to the given question:

Explanation:

For point a:

Interest amounts are paid by sanders in year 1 Under option 1 and 2

In option 1  

Due principal  $\ 49,200$

Rate of Interest $9.50\%$

Expanse Interest $\ 4,674$

In Option 2  

Due principal  $\ 49,200$

Rate of Interest $9.50\%$

Expanse Interest $\ 4,674$

For point b:

Interest amounts are paid by sanders in year 1 Under option 1 and 2

In option 1  

Due principal  $\ 49,200$

Rate of Interest $9.50\%$

Expanse Interest $\ 4,674$  

In Option 2  

Due principal  $\ 44,280$

Rate of Interest $9.50\%$

Expanse Interest $\ 4,207$

For point c:

Option 2 is better for Sanders since it reduces investment expenditure