Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of metal office equipment. As his assistant, you have been asked to review the company’s short-term financing policies and to prepare a report for Smith and the board of directors. To help you get started, Smith has prepared some questions that, when answered, will give him a better idea of the company’s short-term financing policies. In discussing a possible loan with the firm’s banker, Smith found that the bank is willing to lend Dellvoe up to $800,000 for one year at a 9% simple, or quoted, rate. However, he forgot to ask what the specific terms would be.
Assume now that the terms call for an installment (or add-on) loan with equal monthly payments. The add-on loan is for a period of one year.
A. What would be Dellvoe’s monthly payment?
B. What would be the approximate cost of the loan?
C. What would be the EAR?