Greenplanet Recycling Company is considering buying an additional facility at a cost of $500,000. The facility will have an economic life of five years. The company's financial officer, Karen Holmes, can finance the project by:
a. A five-year loan at an annual interest rate of 13 percent
b. A one-year loan rolled over each year for five years
Compare the total interest expenses for both the preceding alternatives under the following assumptions, and calculate the savings in the interest expenses by choosing one of two alternatives:
1. The one-year loan has a constant interest rate of 11 percent per year over the next five years.
2. The one-year loan has an annual interest rate of 11 percent in the first two years, 14 percent in the third and fourth years, and 16 percent in the fifth year.