Question

​(Related to Checkpoint​ 18.2) ​(Calculating the cost of​ short-term financing) The R. Morin Construction Company needs to borrow $120,000 to help finance the cost of a new ​$180,000 hydraulic crane used in the​ firm's commercial construction business. The crane will pay for itself in one​ year, and the firm is considering the following alternatives for financing its​ purchase:

Alternative A. The​ firm's bank has agreed to lend the ​$120,000 at a rate ofb13percent. Interest would be​ discounted, and a 15 percent compensating balance would be required.​ However, the​ compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit​ (checking account) balance of $30,000 in the bank.

Alternative B. The equipment dealer has agreed to finance the equipment with a​ 1-year loan. The ​$120,000 loan requires payment of principal and interest totaling ​$140,628.

a. Which alternative should Morin​ select?

. The cost of Alternative A would be %

b. If the​ bank's compensating-balance requirement had necessitated idle demand deposits equal to 15

percent of the​ loan, what effect would this have had on the cost of the bank loan​ alternative?

Answer 1

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2 v . * . ENG N 00:40 09-02-2020 33 X GH181 2 - GG Vfx b GH Formula Bar GI GJ GK GL G M GN GO GP GQ GK mula sa GS- R MORIN ALTERNATIVE A LOAN AMOUNT INTEREST COMPENSATING BALANCE 13% 120000 15600 18000 164 15% COMPENSATING BALANCE NOT REQUIRED TO BE MAINTAINED AS BANK BALANCE MAINTAINED = 30000 NET LOAN AMOUNT = 104400 (120000 - 15600] SO EFFECTIVE RATE OF INTEREST = 14.94% (=GM163/GM167] INTEREST/NET AMOUNT AVAILABLE ALTERNATIVE B LOAN AMOUNT REPAYMENT AMOUNT 120000 140628 EFFECTIVE RATE OF INTEREST = 17.19% (= (GM174/GM173)- 1] ALTERNATIVE A IS BETTER AS IT HAS LOWER COST 180 181 ALTERNATIVE A Z SCORE insu pv fv cash opti LINE OF CREDIT Sheet1 Sheet2 eoq miller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL WC R...

w v 1% 00:40 . ENG ENG 09-02-2020 33 X X Fax GH199 - - GG GH GI GI GK GL GM GN I GO GP GQ GR GS - 180 ALTERNATIVE A LOAN AMOUNT INTEREST DEMAND DEPOSITS 13% 15% 120000 15600 18000 NET LOAN AMOUNT = 86400 (120000 - 15600 - 18000] SO EFFECTIVE RATE OF INTEREST = 18.06% (=GM183/GM186] INTEREST/NET AMOUNT AVAILABLE 189 190 191 192 ALTERNATIVE B LOAN AMOUNT REPAYMENT AMOUNT 120000 140628 EFFECTIVE RATE OF INTEREST = 17.19% (=(GM193/GM192)- 1] 195 196 197 ALTERNATIVE B IS BETTER AS IT HAS LOWER COST 198 199 201 202 203 Sheet1 Sheet2 Z SCORE insu pv fv cash opti LINE OF CREDIT eoq miller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL WCR ... :