Question

Sanders Co. is planning to finance an expansion of its operations by borrowing $51,100. City Bank has agreed to loan Sanders the funds. Sanders has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $5,110 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 8.5 percent for each option. Required a. What amount of interest will Sanders pay in Year 1 under option 1 and under option 2? (Round your final answers to the nearest dollar amount.) Amount of Interest Under option 1 Under option 2 b. What amount of interest will Sanders pay in Year 2 under option 1 and under option 2? (Round your final answers to th dollar amount.) Amount of Interest Under option 1 Under option 2

Answer 1

- 8.5 | a) Calculation of amount of anterest Borrowing amount - $ 51,100 Interest rate first year interest amount of Interest Obdes- qtion-1. Stoo8:54 344344 Under-option - 2 $51100x8.51 I lony

6) calculation of amount of interest an 2 year onder both option Note :-onder option-1 there is no change As principal amount but an option-2 principal amount coill change principal amount = $51100 - $5110 = $usago Second year Interest amount of interest option - $51100x8151 = $444, option- a $45 990x8.5% € $3909 | s second option is more advantageous to Sanders since every year interest will bave but an option - I sanders have to pay enterest (fined), so there is a loss an interest