Tic & Tac Manufacturing is expanding its facilities and requires a bank loan of $2,000,000 for one year. The banker has offered a stated rate of 5% interest and has offered the company four different options, and management must decide what would be most suitable.

TASK: Compare each alternative by calculating the annual rate of interest for each.

• Option #1: A simple 5% interest with a 8% compensating balance.
• Option #2: Discounted interest.
• Option #3: A 12-month installment loan
• Option #4: Discounted interest with a 1% administration fee

• QUESTION: What option should management pick?