Task 1: Assessing the loan options for Air Best Parts Inc.
1) Air Best Parts is currently seeking loans from National First Bank and Regions Best. National First bank is offering loans at Prime Rate + 6.75% compounded semiannually, while Regions Best is offering 13.17% compounded monthly. Both of these rates are stated rates, and in order to compare these two loan options, the stated rates or APRs must be converted to effective rates. The Prime Rate for National First is 3.25%. Below are the EARs for both banks:
National First: (3.25 + 6.75 = 10%)
[1 + (0.10/2)]^2 -1 = 0.1025 or 10.25%
[1 + (0.1317/12)]^12 – 1 = 0.1399 or 13.99%
2) Based on the calculations above, it is recommended that Air Best Parts Inc. use National First Bank as opposed to Regions Best. The effective rate for National First is 10.25%, which is 3.74% lower than what is being offered by Regions Best. The effective rate is exactly what Air Best Parts will be paying back to the bank in the form of interest to the bank for borrowing money. Since this will be additional money on top of the principal, the goal is to minimize the amount of interest Air Best Parts will have to pay. Going with National First Bank will save the company money.
3) Taking a $6,950,000 loan at 8.6% APR for five years, Air Best Parts can expect their monthly payments to be about $143,059.16. Below is the calculations for the monthly payment:
The first thing we need to do is find the annuity factor for 60 periods at 0.72 % per period:
Annuity PV factor = (1- PV factor)/r
= [1-(1/1.0072^60)]/ .0072
Now, we can determine the monthly payments:
$6,950,000 = C * Annuity PV factor
Rearranging the equation, so that we can solve for C: