Question

eBook Problem Walk-Through Effective Cost of Short-Term Credit Yonge Corporation must arrange financing for its working capital requirements for the coming year. Yonge can: (a) borrow from its bank on a simple interest basis (interest payable at the end of the loan) for 1 year at a 13% nominal rate; (b) borrow on a 3-month, but renewable, loan basis at an 11.2% nominal rate; (c) borrow on an installment loan basis at a 10% add-on rate with 12 end-of-month payments, assuming you borrowed $100; (d) obtain the needed funds by no longer taking discounts and thus increasing its accounts payable. Yonge buys on terms of 1/15, net 60. What is the effective annual cost (not the nominal cost) of each type of credit, assuming 360 days per year? Do not round intermediate calculations. Round your answers to two decimal places. Credit A: Credit B: Credit C: Credit D: What is the least expensive type of credit? -Select-

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Answer 1

Solutions:

Credit A: The Value of Effective rate is 13% as in Simple interest Nominal and effective rate one as the same thing.

Credit B: The Value of Effective rate is 13.22% by considering 11.2% rate of interest compounding quatarly.

Credit C: The Value of Effective rate is 17.97% by considering 10% rate of interest and loan remburse monthly with equal installment of $9.07 on loan of $100.

Credit D.The person bonrrow at 1/15 net 60 means if he pays the amount 15 days early like in 45 days instead of 60 days he saves 1% and company could save this 16 times during the year. So we can say effective rate is 1%x 16 = 16%