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7 January, 07:01

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

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  1. 7 January, 07:10
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    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%
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