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    Calculate effective rate of interest and total interest cost

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    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?

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    Solution Summary

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