Neutron Supplies Company is having problems with its liquidity and is seeking to raise a short-term loan of R325 000 over a period of 90 days. The company has no source of unsecured financing available and is seeking to use its inventories as collateral for secured short-term financing. The carrying value of inventories is currently R575 000, which includes finished goods of R415 000.

The company has received proposals from two banks as follows:

Bank L is offering a trust receipt loan of R325 000 against finished goods inventories. This will attract an annual interest rate of 14,50% on the value of the loan amount drawn down as well as an administration fee of 1,50% on the R325 000 initial loan amount borrowed. The average amount to be borrowed by the company is expected to be R250 000 over the 90-day period.

Bank N is offering a warehouse receipt of R 325 000 on the carrying value of finished goods inventories. This will attract an annual interest rate of 12,25% on the value of the loan amount drawn down as well as a warehousing fee of 2% on the average amount borrowed.

The average amount to be borrowed by the company is expected to be R280000 over the 90-day period.

Assume a 365-day year.

REQUIRED:

1. Calculate the Rand cost of each bank's proposal.

2. Calculate the effective annual rate of each bank's proposal and advise as to which (11) bank's proposal Neutron Supplies Company should accept. Provide a reason for your recommendation.

Round all percentages to two decimal places.

Answer rating: 100% (QA)

To compare the proposals from Bank L and Bank N we need to calculate the Rand cost of each proposal ... View the full answer