Nur Bhd is seeking a loan for a period of for six months for its intended purchase of a computer system. The system will cost RM 250,000 of which only 80% financing is required. Nur Bhd is considering two alternatives:
Alternative 1: A loan from MSU Commerce where it has a balance of RM 20,000 in its current account. Interest is charged at 7% per annum and a compensating balance of 12% is required.
Alternative 2: A loan from Perwira Affin Bank at 6% interest with a 10% compensating balance. Interest is to be paid in advance.
Required:
i. Calculate the effective annual interest rate for the two alternatives.
ii. Which alternative should Nur Bhd choose and why?
