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Explain the advantage of each option

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Dodson Co. is planning to finance an expansion of its operations by borrowing $120,000. City Bank has agreed to loan Dodson the funds. Dodson 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 $12,000 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 8 percent for each option. 

Required:

a. What amount of interest will Dodson pay in year 1
(1) Under option 1? 
(2) Under option 2? 

b. What amount of interest will Dodson pay in year 2
(1) Under option 1? 
(2) Under option 2? 

c. Explain the advantage of each option.

Reference no: EM13924843

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