Economics Question - Equivalent Annual Cost?

Whistling Widgets (WW) may establish a line of credit at First Local Bank. The line of credit would permit WW to meet its short-term cash needs on a routine basis rather than having to process loan requests each time. A typical loan under either the old or the new basis is paid back 6 months later in a lump sum of principal and interest. Over the last 5 years, WW has had such loans outstanding about half the time.





A $100,000 line of credit, however, requires that WW continuously maintain at least $20,000 in an account that pays 6% compounded monthly. If invested internally, WW would earn a nominal 18% on this required deposit. What annual loan processing cost is equivalent to the cost of the required deposit?





I'm not sure if the first part is even relevant. Please help. The book I have provides the end-of-period interest rate tables so giving the solution in terms of F/P, P/F, P/A, etc. is fine.





Thanks!|||so this is about the opportunity cost of the 20,000 and the loan processing cost that would offset it. If you calculate what is paid on a 6% loan, compounded monthly you get the amount to subtract from the opportunity cost of the nominal 18% As I recall, nominal means the inflation effect is included in the rate, so we can conclude that the actual cost of the 20k loan at 18% is $3,600 at the end of the year. Now, subtract the monthly compound interest at 6%, and you get the amount you need to charge for processing to have both be equivalent