A school district is borrowing $40,000,000 over 17 years to fund a building expansion project. The school board can borrow annually for 1 year and then MUST borrow long term (16 years) or, can borrow at a long term fixed rate for the 17 years. The school district is looking at severe budget cuts where they are considering laying off a number of personnel. The choices they are considering are to borrow for one year at 1.75% and then must borrow fixed OR they can borrow for 17 years fixed rate at 4.0%. If they borrow for one year then go fixed, they will save $900,000 in interest that year and save all the jobs. They can borrow annually for to five years then must borrow fixed for the rest of the term. . What do you do and why

This option appears to be more economically advantageous and would save all jobs. Consider why this is the case from the interest paid in each option:

The Interest rate paid at 1.75%:

for one year at 1.75% = $700, 000 (1.75%x40,000,000)
for annually up to five years at 1.75%= $3,500,000 (1.75%x40,000,000x5 years).

The Interest rate paid at 4%:

borrow fixed for 16 years at 4% = $25,600,000 (4% x 40,000,000 x 16)
borrow fixed for 12 years (17-5) at 4% = $19,200,000 (4% x 40,000,000 x 1,600,000)

Total:

First option = $26,300,000 plus all jobs saved

Second option = $22,700,000

Therefore, the first option is more economically advantageous.