Burger Rex is expanding its chain of fast food outlets. This program will require a capital expenditure of $3 million, which must be financed. The company has settled on a three year revolving credit of $3 million, which may be converted into a three year term loan at the expiration of the revolving credit commitment. The commitment fee for both credit arrangements is 0.5 percent of the unused portions. The bank has quoted Burger Rex an interest rate of 1 percent over prime for the revolving credit and 1.5 percent over prime for the term loan, if that option is taken. The company expects to borrow $1.4 million at the outset and another $1.6 million at the very end of the first year. At the expiration of the revolving credit, the company expects to take down the full term loan. At the end of each of the fourth, fifth, and sixth years, it expects to make principal payments of $1 million.
a. For each of the next six years, what is the expected commitment fee in dollars?
b. What is the expected dollar interest cost above the prime rate?