New computer system with an expected life of three years

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Reference no: EM131878284

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. Assume interest is paid in full at the end of each year. a. 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.

8% loan = $36,000 interest

10% loan = $45,000 interest

Interest Savings = $9000 interest

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?

Fixed rate 10% loan = ?

Variable-ratio loan = ?

Additional interest cost = ?

Reference no: EM131878284

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