BoatShare Inc

Subject:FinancePrice: Bought3

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BoatShare Inc. has just received approval to operate in coastal cities across Connecticut. In order to begin operations, it will need to purchase 100 new boats at $45,000 each (i.e., total cost of $4,500,000). To finance this purchase, it will borrow all $4,500,000 for one year from the bank. There is a 90 percent chance that BoatShare will generate sufficient cash flow to repay the loan in full with interest at the end of the year; otherwise, BoatShare will go bankrupt. In the event of bankruptcy, the fleet of used boats can be sold for $1,800,000; however, the legal and administrative costs to the bank of seizing and selling them is $450,000.

What interest rate will the bank charge for the loan if its expected return on loans to companies that are similar to BoatShare is 8 percent?