(Cost of ashort-term bank loan) Jimmy Hale is the owner and operator of the grain elevator inBrownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in adecade, and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current financing sources. He now believes he will need an additional $ 180,000

$180,000 for the3-month period ending with the close of the harvest season. After meeting with hisbanker, Mr. Hale is puzzling over what the additional financing will actually cost. The banker quoted him a rate of 1 percent over prime(which is currently is 5 percent) and also requested that the firm increase its current bank balance of $4,000 up to 20 percent of the loan.

a. If interest and principal are all repaid at the end of the3-month loanterm, what is the annual percentage rate on the loan offer made by Mr.Hale's bank?

b. If the bank were to offer to lower the rate to prime if interest isdiscounted, should Mr. Hale accept thisalternative? Note: Assume a30-day month and360-day year.