Tesla Motors manufactures high-performance battery electric vehicles. An engineer is on a

Tesla committee to evaluate bids for new-generation coordinate-measuring machinery to be

directly linked to the automated manufacturing of high-precision vehicle components. Three

bids include the interest rates that vendors will charge on unpaid balances. To get a clear

understanding of finance costs, Tesla management asked the engineer to determine the

effective semiannual and annual interest rates for each bid. The bids are as follows:

Bid 1: 9% per year, compounded monthly

Bid 2: 3% per quarter, compounded monthly

Bid 3: 8.8% per year, compounded monthly

(a) Determine the effective rate for each bid on the basis of semiannual periods.

(b) What are the effective annual rates? These are to be a part of the final bid selection.

(c) Which bid has the lowest effective annual rate?