Question: Your firm is purchasing a new equipment system, which will last for five years. You can purchase the system for an upfront cost of $150,000.

Your firm is purchasing a new equipment system, which will last for five years. You can purchase the system for an upfront cost of $150,000. Your firm can borrow to finance for this project in two years. Calculate the effective annual interest rate for your firm given that the nominal annual interest rate is 1% p.a. Note that the nominal interest rate is compounded monthly. Briefly discuss what is the difference between an effective annual interest rate and nominal interest rate quote?

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