Tropic Fruit Preserves wants to borrow $4 million for two months. It uses its inventory as collateral for a 15% (APR compounded monthly) loan under a warehouse arrangement where the warehouse fee is $18,000 paid at the end of the two months. What is the EAR of this loan for Tropic Fruit Preserves?

Question

Quizplus · Accepted Answer

D) Using a financial calculator: PV = $4,000,000, I = 15 / 12 = 1.25, N = 2; compute FV = $4,100,625; adding warehouse fees = $4,118,625. EAR = (4,118,625/4,000,000)^(12/2) -1 = 0.1917 or 19.2%

Tropic Fruit Preserves Wants to Borrow $4 Million for Two