To expand its operation, the International Tools Inc.

(ITI) has applied for a $3,500,000 loan from the

International Bank. According to ITI’s financial manager, the company can only afford a maximum yearly
loan payment of $1,000,000. The bank has offered ITI, 1) a 3-year loan with a 10% interest rate, 2) a 4-
year loan with 11% interest rate, 3) a 5-year loan with a 12% interest rate.

(a) Compute the loan payment under each option. (on Excel, attachment)
(b) Which option should the company choose?
Based on the loan payment computation of each option above, we understand that:
In option 1), the company should pay the loan payment of $1,407,402 per year for 3 years. Option 2)
requires the company to pay the loan payment of $1,128,142 per year for 4 years. Option 1) and 2)
do not comply with the capability of company who can only afford a maximum yearly loan payment
of $1,000,000.
In option 3) offers better option for company. With a loan payment of $970,934 per year for 5 years
which is under the maximum yearly loan payment the company could afford, the company should
choose the option 3).