Selecting the best alternative

Reference no: EM1345374

The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following alternatives for financing its purchase:

Alternative A: The firm's bank has agreed to lend the $100,000 at a rate of 14 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However, the compensating-balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank.

Alternative B: The equipment dealer has agreed to finance the equipment with a 1-year loan. The $100,000 loan would require payment of principal and interest totaling $116,300.

a. Which alternative should R. Morin select?
b. If the bank's compensating-balance requirement were to necessitate idle demand deposits equal to 15 percent of the loan, what effect would this have on the cost of the bank loan alternative?

Reference no: EM1345374

Questions Cloud

Identify fluctuating fuel costs : You have been emplayed by American Airlines. Your primary task is to keep the Airline in Business & to ensure, you have to accomplish these 2 goals:

Compute the radius of its path in the magnetic field : A sound wave traveling at 341 m/s is emittedby foghorn of a tugboat. An echo is heard2.40 s later.How far away is the reflecting object? reply in units of m.

Explain a common investment fraud scheme : Explain and discuss a common investment fraud scheme and describe the controls that may be put in place to prevent the fraud.

Find the net flux through a spherical surface : Charges q and Q are placed on the x axis at x = 0 and x = 2.0 m, respectively. If q = -40 pC and Q = +30 pC, define the net flux through a spherical surface (radius = 1.0 m) centered on the origin.

Selecting the best alternative : The R. Morin Construction Corporation requires to borrow $100,000 to help finance cost of a new $150,000 hydraulic crane used in firm's commercial construction business.

Define the number of gallons of gasoline consumed : A rocket is launched at an angle of 56.0° above the horizontal with the initial speed of 101 m/s. The rocket moves for 3.00 s along its initial line of motion with an acceleration of 28.0 m/s2. At this time, its engines fail and the rocket proceeds..

Calculate the monthly car payments : You are planning buying a new, $15,000 car, & you have $2,000 to put toward a down payment. If you can negotiate a nominal yearly interest rate of 10% & finance the car over 60 months,

Find out the number of turns in the solenoid : A certain superconducting magnet in the form of a solenoid of length 0.30 m can produce a magnetic field of 13.0 T in its core when its coils carry a current of 105 A. The windings, made of a niobium-titanium alloy, must be cooled to 4.2 K. Find o..

Facilitating the exporting process : Some argue that government-sponsored agencies such as the Export-Import Bank of the U.S. essentially subsidizes United State exports;

User Account

All Pages