Boatler Used Cadillac Co. requires $920,000 in financing over the next three years. The firm can borrow the funds for three years at 7 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 3 percent interest in the first year, 5 percent in the second year, and 11 percent interest in the third year.

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

Total

Interest costFixed cost financing$Variable short-term financing$

b.Which plan is less costly?

• Fixed cost plan
• Short-term plan