Question

Riley Co. is considering a short-term or long-term financing plan of $4,000,000 assets. It expects the following one-year interest rates over the next three years: 6.5%, 7.75%, and 9%. The long-term interest rate will be 7.5% during those three years. What will be the difference in interest costs over the three years?

Answer 1

Answer:

What will be the difference in interest costs over the three years?

-$30.000  The Long-Term investment it's cheaper than the Short-Term, the interest rate it's  -0,8% lower.

Explanation:

Investment YEAR 1 YEAR 2 YEAR 3 TOTAL

$4,000,000      

   

Long Term     7,50%           7,50%           7,50%        22,5%

Long Term  $300,000   $300,000   $300,000     $900,000  

   

Short-Term     6,50%           7,75%           9,00%         23,3%

Short-Term  $260,000   $310,000   $360,000  $930,000  

DIFFERENCE          -$30.000     -0,8%