John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $46,000.

John needs the money to cover start-up costs in a new business. He hopes to have sufficient backing from other investors by the end of the next 6 months. First Carolina Bank offers John two financing options for the $46,000 loan: a fixed-rate loan at 2.8% above the prime rate, or a variable-rate loan at 1.5% above prime.

Currently, the prime rate of interest is 6.9%, and the consensus interest rate forecast of a group of economists is as follows: 60 days from today the prime rate will rise by 0.5%; 90 days from today the prime rate will rise another 1.2%; 180 days from today the prime rate will drop by 0.5%.

Using the forecast prime rate changes, answer the following questions. Assume a 365-day year.

(Round to the nearest cent.)

a.Calculate the total interest cost over 180 days for a fixed-rate loan.

b.Calculate the total interest cost over 180 days for a variable-rate loan.

c.Which is the lower-interest-cost loan for the next 180 days?