Now, suppose Delta Industries needs to raise $100,000 for 1 year to supply working capital for a new project. Delta Industries is negotiating with First City Bank for this 1-year loan. First City Bank has offered Delta Industries the following four alternatives.

• A 10% annual rate on simple interest loan, with no compensating balance required and interest due at the end of the year.

• A 9% annual rate on a discounted loan.

• A 8% annual rate on a discounted loan, with a 20 percent compensating balance required.

• An add-on interest of 7 percent on a 12-month installment loan.

3. Calculate the effective annual rate for each of the four alternatives provided by bank.

4. Which alternative should Delta Industries go with?