(Cost of a term loan) Temple Freight Forwarding Company needs $300 000 to finance the construction of several prefabricated metal warehouses. The firm that manufactures the warehouses has offered to finance the purchase with a $50 000 down-payment followed by five annual instalments of $69 000 each. Alternatively, Temple’s bank has offered to lend the firm $300 000 to be repaid in 10 half-yearly instalments based on a nominal annual rate of interest of 16%. Finally, the firm could finance the needed $300 000 through a loan from a finance broker requiring a single lump-sum payment of $425 000 in five years.
(a) What is the effective annual rate of interest on the loan from the warehouse manufacturer?
(b) What will the annual payments on the bank loan be?
(c) What is the annual rate of interest for the term loan from the finance broker?
(d) Based on cost considerations only, which source of financing should Temple select?