Eco Friend Ltd requires to borrow $100,000 to finance a new $150,000 machine to be used in a new building project. The machine will pay for itself in one year. The firm is considering the following alternatives to buy the machine:

Option A: The firms bank offers to lend the $100,000 at a rate of 12% by arranging a loan for one year. Interest will be charged every 6 months.

Option B: The machine dealer offers to finance the machine with a one-year loan of $100,000, and the loan would require payment of principal and interest totalling $115,500 at year-end.

(i) Determine the cost of borrowing for each of the financing alternatives. 4 marks.

(ii) Which option should Eco Friend Ltd select? 4 marks.

(iii) What would be your answer if the bank charged a $2000 arrangement fee at the start of the loan for Option A? 2 marks.