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Crazy Cliffs Computers (CCC) purchases computer parts from its suppliers 2/5, net 30. However, to take advantage of the discount CCC needs to get a

  1. Crazy Cliffs Computers (CCC) purchases computer parts from its suppliers 2/5, net 30. However, to take advantage of the discount CCC needs to get a bank loan. CCC is considering two possible 2-year, $100,000 loans. Option #1 is an installment loan (loan is paid off in equal monthly installments). The loan has a stated APR of 6% (monthly compounding) and a 1% closing or origination fee. Option #2 will be paid off in one lump sum at the end of two years. The loan also has a 6% APR (compounded annually) and no origination or closing fee, but requires a 5% ($5,000) compensating balance to be held in a non-interest bearing account at the bank. What are the effective annual interest rates for each option? Which loan, if any, should you take?

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