Question

General Manufacturing wants to borrow $1 million for three months. It uses its inventory as collateral for an 11% (APR) loan under a warehouse arrangement where the warehouse fee is $12,000 paid at the start of the three months. What is the EAR of this loan for General Manufacturing?

A) 2.8%.
B) 4.0%.
C) 17.1%.
D) 24.4%.

Answer 1

C) 17.1%

Step-by-step explanation:

Calculation for What is the EAR of this loan for General Manufacturing

First step is to compute FV using a financial calculator

PV =$1,000,000

I =11/12 =0.9167

N =3 years

Hence ,

FV =$1,027,752.85

Second step is to calculate the amount received

Amount received =$1,000,000 -$12,000

Amount received=$988,000

Now let calculate the actual rate

Actual rate =1,027,753 / 988,000

Actual rate =1.0402

Hence,

EAR =17.1%

Therefore the EAR of this loan for General Manufacturing will be 17.1%