Question

The Odessa Supply Company is considering obtaining a loan from a sales finance company secured by inventories under a field warehousing arrangement. Odessa would be permitted to borrow up to $300,000 under such an arrangement at an annual interest rate of 10 percent. The additional cost of maintaining a field warehouse is $16,000 per year. Determine the annual financing cost of a loan under this arrangement if Odessa borrows the following amounts: a. $300,000b. $250,000

Answer 1

Answer:

a) 15.33%

b) 16.4%

Explanation:

Data provided in the question:

Annual interest rate = 10 percent

Additional cost of maintaining a field warehouse = $16,000 per year.

Now,

Annual financing cost

= [ ( Interest cost + Additional cost ) ÷ Usable funds ] × 100%

For a) Amount borrowed = $300,000

Annual financing cost

= [ ( 10% of $300,000 + $16,000 ) ÷ $300,000 ] × 100%

= 15.33%

For b) Amount borrowed = $250,000

Annual financing cost

= [ ( 10% of $250,000 + $16,000 ) ÷ $250,000] × 100%

= 16.4%