Nirmoh Limited wants to avail short-term loan from the bank. However, bank grants short term loan by keeping the collateral in the form of accounts…

(A) Condition (a) says that accounts shouldn't be overdue for more than 5 days to the net period. In other words, it means those accounts who are overdue by 45 days (40 days + 5 additional days), will not fulfill condition a) and thus will not be eligible for 90% lending. Therefore, from the above, we can see that Accounts DR 03 & DR 07 are overdue for more than 45 days and hence will not be eligible for 90% lending. Condition (b) says that average receivables ageing (payment period) should not exceed 15 days to the net period i.e. it should not exceed 55 days (40 days + 15 days = 55 days). Therefore, from the above, we can see that Accounts DR 04 & DR 10 has an ageing of more than 55 days. Hence, they would also not be eligible for 90% lending. Amount of Bank Lending: Accounts Bank Lending at 90% Bank Lending at 65% DR 01 50,000 - DR 02 25,000 - DR 03 - 1,20,000 DR 04 - 72,000 DR 05 45,000 - DR 06 1,75,000 - DR 07 - 19,000 DR 08 54,000 - DR 09 1,05,000 - DR 10 - 37,000 Total 4,54,000 2,48,000 (-) Reserve 22,700 {4,54,000 x 5%} 37,200 {2,48,000 x 15%} Net 4,31,300 2,10,800 Loan 3,88,170 1,37,020 Total short-term loan granted by the bank = 5,25,190 (B) Calculation of the Effective Interest Cost Interest at 12% (On 90% lending) = 3,88,170 x 0.12 = 46,580.4 Interest at 15% (On 65% lending) = 1,37,020 x 0.15 = 20,553 Total Interest = 67,133.4 Effective Interest Cost (%) = Interest (1-t) / Total Short-term Loan = 67,133.4 (1-0.25) / 5,25,190 Effective Interest Cost (%) = 9.59%