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 $ 10 comma 000 with terms of 2​/10 Net​ 40, so the supplier will give them a 2 % discount if they pay by today​ (when the discount period​ expires). ​ Alternatively, they can pay the full $ 10 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 $ 10 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 12.3 %. The bank will require a​ (no-interest) compensating balance of 4.8 % 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 14.8 %. The loan has a 1.3 % loan origination​ fee, which again H2M will need to borrow to cover.

Answer 1

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