Problem 6-8 Short-term versus longer-term borrowing [LO3] Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.75 percent interest in the first year, 13.25 percent interest in the second year, and 10.15 percent interest in the third year. Assume interest is paid in full at the end of each year. a. Determine the total interest cost under each plan. b. Which plan is less costly? Input variables: Required financing . Loan term Fixed cost interest rate Short-term interest rate - Year 1 Short-term interest rate Year 2 Short-term interest rate - Year 3 $550,000 3 years 0.11 0.0875 0.1325 0.1015 Solution and Explanation: la. Long-term fixed-rate interest cost: Short-term variable-rate interest cost: Year 1 interest Year 2 interest Year 3 interest Total interest b. Least costly plan Problem 6-8 Short-term versus longer-term borrowing [LO3] Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.75 percent interest in the first year, 13.25 percent interest in the second year, and 10.15 percent interest in the third year. Assume interest is paid in full at the end of each year. a. Determine the total interest cost under each plan. b. Which plan is less costly? Input variables: Required financing . Loan term Fixed cost interest rate Short-term interest rate - Year 1 Short-term interest rate Year 2 Short-term interest rate - Year 3 $550,000 3 years 0.11 0.0875 0.1325 0.1015 Solution and Explanation: la. Long-term fixed-rate interest cost: Short-term variable-rate interest cost: Year 1 interest Year 2 interest Year 3 interest Total interest b. Least costly plan