Lump sum of principal and interest

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Reference no: EM131806982

Whistling Widgets (WW) may establish a line of credit at First Local Bank. The line of credit would permit WW to meet its short-term cash needs on a routine basis rather than having to process loan requests each time. A typical loan under either the old or the new basis is paid back 6 months later in a lump sum of principal and interest. Over the last 5 years, WW has had such loans outstanding about half the time.

A $100,000 line of credit, however, requires that WW continuously maintain at least $20,000 in an account that pays 6% compounded monthly. If invested internally, WW would earn a nominal 18% on this required deposit. What annual loan-processing cost is equivalent to the cost of the required deposit?

Reference no: EM131806982

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