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.

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.

8 percent loan: 36000 (Correct)

10 percent loan: 45000 (correct)

Interest Savings: 9000 (correct)

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? Fixed-rate 10% loan:

Variable-rate loan:

Additional Interest Cost: $13,500 (correct)