Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision abou

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 $12,500 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 $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 12.3%. The bank will require a (no-interest) compensating balance of 5.2% of the face value of the loan and will charge a $95 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 15%. The loan has a 1.5% loan origination fee, which again H2M will need to borrow to cover.

Explanation / Answer

Alt-1 Pay full $12,500 Alt-2 Borrow =12500*.98*1.052+95             12,982.00 Pay = 12982*(1+12%/12)-12982*5.2%             12,436.76 Alt-3 Borrow=12500*.98/.985             12,436.55 Pay=12436.55*(1+15%/12)             12,592.01 Since in Alt-2 involves lower payment amount so it is best alternative

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.