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31 October, 12:06

Sanders Co. is planning to finance an expansion of its operations by borrowing $150,000. City Bank has agreed to loan Sanders the funds. Sanders 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 $15,000 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 Sanders pay in year 1 under option 1 and under option 2?

Amount of Interest

Under option 1

Under option 2

b. Wihat anount of insyinyder option 1 and under option 27 (Round your final answers to the nearest dollar amount)

Amount of Interest

Under option 1

Under option 2

c. Which option is more advantageous to Sanders?

A. Option 1

B. Option 2

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Answers (1)
  1. 31 October, 12:26
    0
    a. Amount of Interest year 1

    Under option 1 = $12,000

    Under option 2 = $12,000

    b. Amount of Interest year 2

    Under option 1 = $12,000

    Under option 2 = $10,800

    c. Which option is more advantageous to Sanders?

    B. Option 2

    With option 2, interest decreases as the years pass.

    Explanation:

    (1) to issue a note with the principal due in 10 years and with interest payable annually

    Notes payable $150,000

    Interest expense per year = $150,000 x 8% = $12,000

    or (2) to issue a note to repay $15,000 of the principal each year along with the annual interest based on the unpaid principal balance.

    Note payable $15,000 + ($150,000 x 8%) = $27,000

    interest expense year 1 = $12,000

    year 2:

    Note payable $15,000 + ($135,000 x 8%) = $25,800

    interest expense year 1 = $10,800
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