Answer:
a)
The rate of interest qouted = 1% + 7% = 8%
The annual interest expenses = $220,000*8%= $17,600.
Mr Hale has to increase the amount of bank balance with bank from $4,000 currently to $44,000 (20% of $220,000). The net amount of money he would recieve= $220,000 -($44,000 - $4,000) = $180,000.
Therefore the net cost of borrowing = ($17,600/$180,000)*100= 9.78%.
b)
if the interest rate is lowered to 7%, then annual interest expenses = $220,000*7%= $15,400.
The net annual cost of borrowing= ($15,400/$180,000)*100= 0.0855555 Or 8.55%.
Since interest rates has fallen, he can accept the project.
Explanation:
