Use the information in problem 1, except assume that the loan will be repaid in 5 years. What is the incremental cost of borrowing the extra money?
A) 13.95%
B) 13.67%
C) 14.42%
D) 12.39%

Question

Quizplus · Accepted Answer

The incremental cost of borrowing the extra money is the difference in the annual interest payments between the two loans. The annual interest payment on the original loan is $100,000 x 0.10 = $10,000. The annual interest payment on the new loan is $150,000 x 0.10 = $15,000. The incremental cost of borrowing the extra money is $15,000 - $10,000 = $5,000. The incremental cost of borrowing the extra money as a percentage of the extra money borrowed is $5,000 / $50,000 = 0.10 = 10%.

Use the Information in Problem 1, Except Assume That the Loan