Boatler Used Cadillac Co. requires $900,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Ms. Boatler decides to do forecasting and predicts that if she utilizes short-term financing instead, she will pay 7.75 percent interest in the first year and 13.55 percent interest in the second year. Assume interest is paid in full at the end of each year.

a. Determine the total two-year interest cost under each plan.

	Interest Cost
Long-Term fixed- rate
Short-term variable - rate

b. Which plan is less costly?

multiple choice

• Long-term fixed-rate plan

• Short-term variable-rate plan