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Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $430,000. The
company can borrow $430,000 for three years at 13 percent annual interest or for one year at 11 percent annual interest. Assume
interest is paid in full at the end of each year.
a. 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 11 percent rate? Compare this to the 13 percent three-year loan.
Interest
11 percent loan
$
141,900
13 percent loan
167,700
Interest savings
$
25,800
b. What if interest rates on the 11 percent loan go up to 16 percent in year 2 and 19 percent in year 3? What would be the total interest
cost compared to the 13 percent, three-year loan?
Interest
Fixed-rate 13% loan
Variable-rate loan
Additional interest cost

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