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# Calculate effective rate of interest and total interest cost

Question #1

Sauer 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 percent annual interest or for one year at 8
percent annual interest.
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 8 percent rate? Compare this to the 10
percent three-year loan. What if interest rates on the 8 percent loan go up to 13
percent in year 2 and 18 percent in year 3? What would be the total interest cost
compared to the 10 percent, three-year loan?

Question #2

Vroom Motorcycle Company is borrowing \$30,000 from First State Bank. The
total interest is \$9,000. The loan will be paid by making equal monthly
payments for the next three years. What is the effective rate of interest on this
installment loan?

#### Solution Summary

In an Excel format, the response calculates and explains the answers to both problems.

\$2.19