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Financial Accounting

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Moderate

Cash Outflows for Two Bonds

FINACT-MXJKEF

Pet.com is considering issuing a 10-year \$5,000,000 bond on 1/1/2016 with a stated interest rate 5% and an effective interest rate 6% (interest is paid annually) or a 5-year \$7,500,000 bond on 1/1/2016 with a state interest rate 4% and an effective interest rate 3% (interest is paid annually).

Pet.com would like to make the decision based on the total cash outflows of each scenario. That is, the company will select the bond with the smallest total future cash outflows. Which bond should Pet.com choose?​

A

The 10-year bond

B

The 5-year bond

C

Pet.com is indifferent