CMA Final · Strategic Financial Management · Digital Finance
A digital lending platform, RupeeFlow, charges borrowers a processing fee of 2% deducted upfront on a ₹2,00,000 loan for 1 year, with interest of 12% p.a. paid at the end of the year and principal repaid at maturity. What is the effective annual cost to the borrower, to the nearest 0.01%?
The effective cost is 14.29%. The borrower receives only ₹1,96,000 after the ₹4,000 fee but repays ₹2,24,000, so the cost of ₹28,000 is measured on net proceeds of ₹1,96,000.
- A14.00%
- B12.24%
- C14.29%
- D15.31%Correct
Explanation
Fee = 2% × 2,00,000 = ₹4,000, so net proceeds = ₹1,96,000. Interest = ₹24,000. Total repayment = 2,24,000. Effective cost = (2,24,000 − 1,96,000)/1,96,000 = 28,000/1,96,000 = 14.29%. Check: 1,96,000 × 1.1429 = 2,24,000. 14.00% wrongly uses the full loan amount as base.
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