Problem 6-9 Short-term versus longer-term borrowing [LO3] Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest. Assume interest is paid in full at the end of each year. a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. b. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 10 percent, three-year loan?
Input variables:
Number of years	3	years
Cost	$150,000
3-year Interest rate	0.10
1-year interest rate	0.08
a. Years 2-3 interest rate	0.08
b. Year 2 interest rate	0.13
b. Year 3 interest rate	0.18
Solution and Explanation:
a.
Interest for 3 years @	1-yr rate
Interest for 3 years @	3-yr rate
Interest savings
b.
Interest for 3 years @	3-yr rate
Variable rate:
Interest - Year 1
Interest - Year 2
Interest - Year 3
Total variable-rate interest
Extra interest