Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets can borrow long-term at 8 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 6 percent interest in the first year. Then, Kuznets projects paying 9 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true?

Question

Quizplus · Accepted Answer

Under long-term financing, the total interest paid will be $80,000 (8% of $500,000 for two years). 
Under short-term financing, the total interest paid will be $30,000 in the first year (6% of $500,000) and $45,000 in the second year (9% of $500,000). 
So in total, Kuznets will pay $75,000 under the short-term plan, which is less than $80,000 under long-term financing. Therefore, Kuznets will probably pay less under the short-term financing plan.

Kuznets Rental Center Requires $500,000 in Financing Over the Next