A small airline executive charter company needs to borrow $160,000 to purchase a prototype synthetic vision system (SVS) for one of its business jets. The SVS is intended to improve the pilots’ situational awareness when visibility is impaired. The local (and only) banker makes this statement: “We can loan you $160,000 at a very favorable rate of 12% per year for a five-year loan. However, to secure this loan, you must agree to establish a checking account (with no interest) in which the minimum average balance is $32,000. In addition, your interest payments are due at the end of each year, and the principal will be repaid in a lump-sum amount at the end of year five.” What is the true effective annual interest rate being charged?
A small airline executive charter company needs to borrow $160,000 to purchase a prototype synthetic vision system (SVS) for one of its business jets. The SVS is intended to improve the pilots’ situational awareness when visibility is impaired. The local (and only) banker makes this statement: “We can loan you $160,000 at a very favorable rate of 12% per year for a five-year loan. However, to secure this loan, you must agree to establish a checking account (with no interest) in which the minimum average balance is $32,000. In addition, your interest payments are due at the end of each year, and the principal will be repaid in a lump-sum amount at the end of year five.” What is the true effective annual interest rate being charged?
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