Tropic Fruit Preserves wants to borrow $4 million for two months. It uses its inventory as collateral for a 15% (APR)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

First, we need to calculate the total cost of the loan: 
Interest = $4,000,000 x 0.15 x (2/12) = $100,000
Warehouse fee = $18,000
Total cost = $100,000 + $18,000 = $118,000

Next, we need to use the total cost and loan amount to calculate the EAR:
EAR = ((1 + APR/m)^m - 1)
EAR = ((1 + 0.15/12)^12 - 1)
EAR = 0.1593 or 15.93%

Therefore, the best choice is D, with an EAR of 19.2%.

Tropic Fruit Preserves Wants to Borrow $4 Million for Two