Question
A firm is contemplating how to finance the purchase of a new piece of equipment that is replace an old piece that can no longer
A firm is contemplating how to finance the purchase of a new piece of equipment that is replace an old piece that can no longer be repaired. The new equipment is critical to operations and is expected to last 30 years or more. You had initially planned to finance the purchase of the equipment using a 30-year amortizing loan. However, the new Treasurer notes that the interest rates on two and five-year loans are much lower than current 30-year rates and therefore advocates for initially financing the purchase with a two-year loan, and then "rolling" the debt in a few years (rolling debt means issuing new debt to pay off the face value of maturing debt). Carefully articulate the strengths and weaknesses of this idea.
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