Beckheart is seeking financing for its inventory. Safe-proof Warehouses offers s

Question

Beckheart is seeking financing for its inventory. Safe-proof Warehouses offers space in their facility for Beckhearts inventory. They offer loans with a 15 percent APR equal to 60 percent of the inventory. Monthly fees for the usage of the warehouse are $500 plus 0.5 percent of the inventorys value. If Beckheart has saleable inventory of $2 million,

a. How much money can the firm borrow?
b. What is the interest cost of the loan in dollars over a year?
c. What is the total amount of fees to be paid in a year?
d. What is the effective annual rate of using Safe-proof to finance Beckhearts inventory?

Explanation / Answer

a. money the firm can borrow =60%*2 million = $1.2 million b. Interest cost = 15%*1.2 million= 0.18 million c. total amount of fees to be paid in a year=($500 +0.5%*$2 million)*12 = $126,000 d. Effective annual rate =(0.18M+$126,000 +$1.2M)/$1.2M -1 = 25.50%

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