ABC & XYZ Manufacturing is expanding its facilities and requires a bank loan of $4,000,000 for one year.The banker has offered a stated rate of 9% interest and has offered the company four different options, and management must decide what would be most suitable.

TASK: Compare each alternative by calculating the annual rate of interest for each.

• Option #1: A simple 9% interest with a10% compensating balance.
• Option #2: Discounted interest.
• Option #3: A 12-month installment loan
• Option #4: Discounted interest with a 2% administration fee.

QUESTION:What option should management pick?