6-6 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 cent annual intel 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. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What is the total interest cost now compared to the 10 percent, three-year loan? Solution Sauer Food Company If Rates are Constant $150,000 borrowed x 8% per annum x 3 years $36000 interest cost $150,000 borrowed x 10% per annum x 3 years $45.000 interest cost $45,000-$36,000=$9,000 interest savings borrowing short-term If Short-term Rates Change I st year $150,000x.08=$12,000 2nd year $l50,000x.13=$19500 3rd year $150000x.18=$27000 Total=$58.500 $58, 500-$45,000=$13, 500 extra interest costs borrowing short- term CopyrightC 2005 by The McGray-Hill Companies, Inc. S-218Copyright © 2005 by The McGraw-Hill Companies, Inc. S-218 6-6. 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. 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. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What is the total interest cost now compared to the 10 percent, three-year loan? Solution: Sauer Food Company If Rates Are Constant $150,000 borrowed x 8% per annum x 3 years = $36,000 interest cost $150,000 borrowed x 10% per annum x 3 years = $45,000 interest cost $45,000 – $36,000 = $9,000 interest savings borrowing short-term If Short-term Rates Change 1 st year $150,000 x .08 = $12,000 $150,000 x .13 = $19,500 $150,000 x .18 = $27,000 2 nd year 3 rd year Total = $58,500 $58,500 – $45,000 = $13,500 extra interest costs borrowing short￾term