Deseret Resources has received approval for a 5-year term loan from a commer- cial bank for $2 million at a stated interest rate of 8 percent. The loan requires that interest be paid at the end of each year on the balance remaining at the beginning of each year. In addition, a principal payment of $250,000 must be paid at the end of each of the first four years, with the remaining balance being paid off at the end of five years.
The bank will charge Deseret a $50,000 loan- processing fee.
a. What payments are required at the end of each of the five years?
b. What is the effective, pretax cost of this loan?