Problem 6-7 Short-term versus longer-term borrowing [LO3] Boatler Used Cadillac Co. requires $850,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 7.75 percent interest in the first year and 13.55 percent interest in thesecond year. Assume interest is paid in full at theend of each year a. Determinethetotal two-year interest cost under each plan b. Which plan is less costly? Input variables: $850,000 Required financing Loan term Fixed cost interest rate Short-term interest rate Short-term interest rate 2 years Year 1 Year 2 0.12 0.0775 0.1355 Solution and Explanation: Long-term fixed-rate interest cost Short-term variable-rate interest cost: Year 1 interest Year 2 interest Total interest b. Least costly plan