SSD corp needs an additional fund of RM1,200,000.00 to finance its short-term project.

The project will take eight (8) months to be completed. The company has the following

alternatives to choose from. Calculate the effective cost for each of the following alternatives.

REQUIRED:

Compute the Effective Interest Rate (EIR) for each of the alternatives:

Trade credit

Forego a trade credit with favourable term of 3/15, net 50

Bank financing

A loan from MNB Bank at a discounted interest rate of 8 percent per annum and 15 percent compensating balance. The present account balance of the company is RM150,000.00.

Revolving credit

A revolving credit facility of RM1,500,000.00 which charges 10 percent annual interest rate, and 3 percent commitment fee on the unused portion. The bank also requires a 10 percent compensating balance

Commercial Paper

Issue a commercial paper at a face value of RM100,000.00 per paper. The interest rate is 9 percent per annum. The issuing cost is RM1,500.00 per paper.

Based on the calculation of EIR above, choose the best alternative and provide reasons for your answer