Cost of Short-term Credit: Faircross Farms harvests its crops four times annuall
ID: 2647718 • Letter: C
Question
Cost of Short-term Credit:
Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped. However, planting, irrigating, and harvesting must be done on a nearly continual schedule. The firm uses 90-day bank notes to finance its operations. The firm arranges an 12 percent discount interest loan with a 15 percent compensating balance four times annually. What is the effective annual interest rate of these discount loans?
Gladys Turner borrowed $30,000 from the bank using a 9 percent
Explanation / Answer
answer
1) calculation of effective intrest rate of the loan farmula 1+i/n^n-1 (1+0.035*4)-1 14.75% 2) farmula 1+i/n^n-1 (1+0.0225*4)-1 9.31% 3) effective annual cost of traid credit 2/15 net 40 he already buy credit of 90 days 50*14.75%/360