XYZ Company Starting balance (cash in hand at the beginning of 2007)= 1 million Company plans to keep a reserve of 0.5 million at the end of each year to protect against any uncertainties. Cash Flow Requirement

Year Projected Net Cash Flow (millions of dollars)
Year Projected Net Cash Flow (millions of dollars)

Year Projected Net Cash Flow (millions of dollars)
Year Projected Net Cash Flow (millions of dollars)

2007 –8 ; 2012 3; 2008 –2 ;2013 –4 ;2009 –4; 2014 7; 2010 3; 2015 –2; 2011 6; 2016 10
Their short-term cash flow requirements cannot be met without borrowing. A long-term (10 year) loan can be taken with an interest rate of 7% A series of short-term loans (1 year) can be taken with a projected interest rate of 10%

Principle amount Long term loan will be paid after 10 years. Principle amount for the short term loan is to be paid in next year. If I take a short term loan in 2007, I pay the interest and the principle amount in 2008; for long term loan, I start paying interest from 2008.

Question: Which loan (or combination of loans) should be taken, and in what amounts, in order to minimize the cost of funds?