6 Procter Micro-Computers, Inc. requires $1, 200,000 in financing over the next two years. The firm can borrow the funds for two years at 9.5 percent interest er year. Mr. Procter decides to do economic forecasting and determines that if he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly? Solution: Procter-Mini-Computers, Inc. Cost of Two year fixed Cost financing $1, 200,000 borrowed x.5% per annum x 2 years=$228, 000 interest Cost of Two Year Variable Short-term Financing Ist year $1,200,000x 6.55% per annum= $78,600 interest cost 2nd year $1, 200,000x 10.95% per annum=$131.400 interest cost $210,000 two-year total The short-term plan is less costl -217 Copyright C2005 by The McGra-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-217 6-5. Procter Micro-Computers, Inc. requires $1,200,000 in financing over the next two years. The firm can borrow the funds for two years at 9.5 percent interest per year. Mr. Procter decides to do economic forecasting and determines that if he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly? Solution: Procter-Mini-Computers, Inc. Cost of Two Year Fixed Cost Financing $1,200,000 borrowed x 9.5% per annum x 2 years = $228,000 interest cost Cost of Two Year Variable Short-term Financing 1 st year $1,200,000 x 6.55% per annum = $ 78,600 interest cost 2 nd year $1,200,000 x 10.95% per annum = $131,400 interest cost $210,000 two-year total The short-term plan is less costly