option 1: A bank offers you a bullet loan for the full year of RM500,000 to be repaid at end year with interest fixed at 12% p.a.

option 2: An overdraft facility, with a quoted rate of 14% p.a., with thee interested charged quarterly on the average balance.

The firm expects to need finance of RM400,000 in the first quarter, RM500,000 in quarter 2, RM500,000 in quarter 3 and only RM200,000 in the final quarter due to the seasonal nature of its business. (These are all quarterly averages)

Unused funds can be invested at 2% per quarter. The bank will not charge interest on accumulated quarterly interest charges.

Required:

1. recommend which offer is more attractive in financial term to the firms
2. calculate the rate of the overdraft in which the firm is indifferent between the two options.