1) A bank offers your firm a revolving credit arrangement for up to $52 million
ID: 2644041 • Letter: 1
Question
1)A bank offers your firm a revolving credit arrangement for up to $52 million at an interest rate of 1.30 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays .65 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. What is your effective annual interest rate on the lending arrangement if you borrow $22 million immediately and repay it in one year?
Mt. Brydges Submarine Manufacturing (MSM) is investigating a lockbox system to reduce its collection time. It has determined the following:
Average number of payments per day 435. Average vale of payment is $1,025. Variable lockbox fee (per transaction) $0.30. Daily interest on money market securities 0.068%.
The total collection time will be reduced by three days if the lockbox system is adopted.
What is the NPV of adopting the lockbox system?
Explanation / Answer
2.63% is the effective rate of interest
D is the correct one, because you havent provided the cost of machine and its life period.
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