Sanders Company is planning to finance an expansion of its operations by borrowing $50,100. City Bank has agreed to loan Sanders the funds. Sanders has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $5,010 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 12 percent for each option.

Required

a. What amount of interest will Sanders pay in Year 1 under option 1 and under option 2? b. What amount of interest will Sanders pay in Year 2 under option 1 and under option 2? c. Which option is less costly in the long run?