Only July 1, 2019, Sriwijaya Metal Works arranged for a line of credit with Bank Mandiri of Jakarta, Indonesia. The terms of the agreement call for a Rp200,000 (Indonesian rupiah) maximum loan with interest set at 2 percent over prime. In addition, the firm has to maintain an 18 percent compensation balance in its demand deposit account throughout the year. The prime rate is currently 4 percent.

a. If Sriwijaya normally maintains a Rp30,000 to Rp40,000 balance in its checking account with Bank Mandiri, what is the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year?

b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year.