Reference no: EM131620840
Hand-to-Mouth (H2M) is currently? cash-constrained, and must make a decision about whether to delay paying one of its? suppliers, or take out a loan. They owe the supplier $10,000 with terms of 1.8?/10 Net? 40, so the supplier will give them a 1.8% discount if they pay by today? (when the discount period? expires). ? Alternatively, they can pay the full $10,000 in one month when the invoice is due. H2M is considering three? options:
Alternative? A: Forgo the discount on its trade credit? agreement, wait and pay the full $10,000 in one month.
Alternative? B: Borrow the money needed to pay its supplier today from Bank? A, which has offered a? one-month loan at an APR of 12%.
The bank will require a?(no-interest) compensating balance of 4.5% of the face value of the loan and will charge a $100
loan origination fee. Because H2M has no? cash, it will need to borrow the funds to cover these additional amounts as well.
Alternative? C: Borrow the money needed to pay its supplier today from Bank? B, which has offered a? one-month loan at an APR of 15.1%.
The loan has a 1.3% loan origination? fee, which again H2M will need to borrow to cover.
Alternative? A B and C :
The effective annual cost is
?(Round to two decimal? places.) for each option
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Currently? cash-constrained
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