ACI Ltd. requires working capital of Tk. 10,00,000. There are two alternatives:

(i) Bank loan Mutual Trust Bank is interested to grant Tk. 10,00,000 as a loan @ 12% per annum for 6 month after reduction of 5% as compensating balance.

(ii) Commercial paper: To issue commercial paper at 12%. The cost of issuing would be Tk. 20,000 in each quarter.

Requirements:

(a) Calculate the effective interest rate of first alternative.

(b) Which alternative should the company and why?