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    Financing: Choosing between two plans

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    4) Boatler Used Cadillac Co. requires $80,000 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 economic forecasting and determines 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?

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    Solution Preview

    Plan 1

    Year 1:
    Principal= $80,000
    Interest= $7,200 =9%*80000

    year 2

    Principal= ...

    Solution Summary

    The solution calculates the interest cost of two financing plans