Question

CDRW is evaluating an inventory financing arrangement with DVD banks. CDRW estimates an average monthly inventory...

CDRW is evaluating an inventory financing arrangement with DVD banks. CDRW estimates an average monthly inventory balance of $800,000. DVD Bank is offering a 12 percent APR loan on 75% of the value of the inventory. DVD's inventory storage and evaluation fees will be 1 percent a month on the total value of the inventory. What is the annual effective rate of the inventory loan?

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Answer #1

Total interest will be paid = Interest rate x (Inventory balance x Percentage loan on inventory)

Total interest will be paid = 12% x (800000 x 75%)

Total interest will be paid = $72,000

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Loan value = $600,000 (800000x75%)

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Evaluation fee = Inventory value x 1% = 800000 x 1% = $8,000

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Annual effective rate = Total interest paid /(Loan value-Evaluation fees)

Annual effective rate = 72000/(600000-8000)

Annual effective rate = 12.162162%

Annual effective rate = 12.16%

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