Problem: Procter Micro-Computers, Inc., requires $1,200,000 in financing over the next two years. The firm can borrow the funds for two years at 9.5 percent interest per year. Mr. Procter decides to do economic forecasting and determines that if he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly?
Modern Tombstones has estimated monthly financing requirements for the next
six months as follows:
January. . . . . . . . . . . . . $20,000 April . . . . . . . . . . . . . . $10,000
February . . . . . . . . . . . . 6,000 May . . . . . . . . . . . . . . 22,000
March . . . . . . . . . . . . . . 8,000 June . . . . . . . . . . . . . . 12,000
Short-term financing will be utilized for the next six months. Projected annual
interest rates are:
January. . . . . . . . . . . . . 9.0% April . . . . . . . . . . . . . . 15.0%
February . . . . . . . . . . . . 8.0% May . . . . . . . . . . . . . . 12.0%
March . . . . . . . . . . . . . . 12.0% June . . . . . . . . . . . . . . 9.0%
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total dollar interest payments be larger or smaller?