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 $ 12 comma 500
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 $ 12,500 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 $ 12,500 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 12.4 %. The bank will require a (no-interest) compensating balance of 4.6 % of the face value of the loan and will charge a $ 90 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 1.3 % loan origination fee, which again H2M will need to borrow to cover.
Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $ 12,500 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 12.4 %. The bank will require a (no-interest) compensating balance of 4.6 % of the face value of the loan and will charge a $ 90 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 1.3 % loan origination fee, which again H2M will need to borrow to cover.
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