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