Boats R Us requires $800,000 in financing over the next 2 years. The firm can borrow the funds for 2 years at 12% interest per year. The owner, Boaty McBoaterson, decides to do forecasting and predicts that if he utilizes short term financing instead, he will pay 7.00% interest the first year, and 13.95% interest the second year. Determine the total 2-year interest cost under each plan. Which plan is less costly

Question

Malakai Bean

Business

18 February, 10:38

Boats R Us requires $800,000 in financing over the next 2 years. The firm can borrow the funds for 2 years at 12% interest per year. The owner, Boaty McBoaterson, decides to do forecasting and predicts that if he utilizes short term financing instead, he will pay 7.00% interest the first year, and 13.95% interest the second year. Determine the total 2-year interest cost under each plan. Which plan is less costly

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Answers (1)

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Gloria Hunt · Answer 1

Answer: Short term is less costly

Explanation:

Total interest cost under long term financing = 800,000 * 12% * 2

= 800000 * 0.12 * 2

= $192,000

Total interest cost under short term financing = (800,000 * 7% * 1) + (800,000 * 13.95% * 1) =

= (800000*0.07*1) + (800,000*0.139*1)

= $167,600

Based on the above solution, Short term financing is less costly.