Reference no: EM131190741
DVNY, Inc. is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $13,000, but the supplier will give them a 2.2% discount if they pay by today (when the discount period expires). That is, they can either pay $12,714 today, or 13,000 in one month when the net invoice is due. Because FIN515-DVNY, Inc.
Does not have the $12,714 in cash right now, it is considering three options:
Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $13,000 in one month.
Alternative B: Borrow the money from Bank A, which has offered to lend the firm $12,714 for one month at an APR (compounded monthly) of 11.9%. The bank will require a (no-interest) compensating balance of 5.3% of the face value of the loan and will charge a $105 loan origination fee, which means FIN515-DVNY, Inc. must borrow even more than the $12,714.
Alternative C: Borrow the money from Bank B, which has offered to lend the firm $12,714 for one month at an APR of %15.2% (compounded monthly). The loan has a 0.6% loan origination fee.
For each alternative calculate Effective Interest Rate (15 points each for a total of 45 points - Show your work to gain any credit.)
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