Question

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 $ 11 comma 000 with terms of 2.4​/10 Net​ 40, so the supplier will give them a 2.4 % discount if they pay by today​ (when the discount period​ expires). ​ Alternatively, they can pay the full $ 11 comma 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 $ 11 comma 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 11.6 %. 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. 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 14.9 %. The loan has a 0.8 % loan origination​ fee, which again H2M will need to borrow to cover. Alternative​ A: The effective annual cost is 33.84​%. ​(Round to two decimal​ places.) Alternative​ B: The effective annual rate is nothing​%. ​(Round to two decimal​ places.)

Answer 1

SEE THE SCREENSHOT. ANY DOUBTS, HAPPY TO HELP YOU. THANK YOU. THUMBS UP PLEASE.

ALT C BANK B 11000 loan amount origination fee net loan amount interest for a month rate for 30 days : 88 (11000*0.896) 10912 122.47-10000*14.9%*30/365] 1.9288%-(11000 + 122.47)/10912-1 ] [-loan amount + interest/net loan amount] EAR 26.17% (1+1.9288%)^(365/30-1 ANSWER: go for bank B as cost is lowest