Round all answers to the nearest dollar 9. Accounts receivable as collateral, co

Question

Round all answers to the nearest dollar

9.Accounts receivable as collateral, cost of borrowingMaximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $250,000that it will accept as collateral. The bank's terms include a lending rate set at primeplus+2.5% and a 1.5% commission charge. The prime rate currently is 8%.

a.The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 90% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software?

b.What is Scientific Software's effective annual rate of interest if it borrows $150,000 for 12 months? For 6 months? For 3 months?(Note:Assume a 365-day year and a prime rate that remains at 8% during the life of the loan.)

Explanation / Answer

a)

maximum amount = (250000 - 250000 *10%) * 0.9 = 202500

b)

interest = 150000 * 0.015 + 150000 * 0.105 = 18000

interest cost = 18000/150000 = 12% for 12 months

interest = 150000 * 0.015 + 150000 * 0.105/2 = 10125

interest cost = 10125/150000 = 6.75% for 6 months

effective annual rate = (1+6.75%)^2 -1 = 13.96%

interest = 150000 * 0.015 + 150000 * 0.105/4 = 6187.6

interest cost = 6187.5/150000 = 4.125% for 3 months

effective annual rate = (1+4.125%)^4 -1 = 17.55%

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