91Ó°ÊÓ

The following information is provided:

Cost of computer system = $150,000

Expected life = 3 years

Interest for three years = 10%

Interest forthefirst year = 8%

Interest forthesecond year = 13%

Interest for the third year = 18%

The expected sales for next year are $36,000.

$$\begin{gathered} Costoffinancing=Borrowedfunds×Interestrate×Time \\ =\$150,000×\$8\%p.a.×3 \\ =\$36,000 \end{gathered}$$

The expected sales for next year are $45,000.

$$\begin{gathered} Costoffinancing=Borrowedfunds×Interestrate×Time \\ =\$150,000×\$10\%p.a.×3 \\ =\$45,000 \end{gathered}$$

The interest savings when short-term financing is utilized is $9,000.

$$\begin{gathered} Interestsavings=Costofthreeyearloan-Costofshorttermfinancing \\ =\$45,000-\$36,000 \\ =\$9,000 \end{gathered}$$

The cost of borrowing is $58,500.

$$\begin{gathered} Costoffinancing=Borrowedfunds×Interestrate×Time \\ =\left(\$150,000×\$8\%p.a.×1\right)+ \\ \left(\$150,000×\$13\%p.a.×1\right)+ \\ \left(\$150,000×\$18\%p.a.×1\right) \\ =\$12,000+\$19,500+\$27,000 \\ =\$58,500 \end{gathered}$$

The extra cost of a short-term loan when the rates are changing is $13,500.

$$\begin{gathered} ExtraCost=Costofshorttermloanwhenratesarechanging-Costofshorttermloanwhenratesarecons\tan t \\ =\$58,500-\$45,000 \\ =\$13,500 \end{gathered}$$