Problem:
Boatler Used Cadillac Co. requires $1,050,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 7.75 percent interest in the first year and 13.55 percent interest in the second year.
Required:
Question: Determine the total two-year interest cost under each plan. The interest cost of Interest Cost Financing and Variable Short-Term Financing.
Note: Show supporting computations in good form.