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Hand-to-Mouth (H2M) is currently​ cash-constrained, and must make a decision about whether to delay paying one...

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Finance

Hand-to-Mouth (H2M) is currently​ cash-constrained, and mustmake a decision about whether to delay paying one of its​suppliers, or take out a loan. They owe the supplier $ 12 comma 500with 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 onemonth 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 suppliertoday from Bank​ A, which has offered a​ one-month loan at an APRof 12.4 %. The bank will require a​ (no-interest) compensatingbalance 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 toborrow the funds to cover these additional amounts as well.

Alternative​ C: Borrow the money needed to pay its suppliertoday from Bank​ B, which has offered a​ one-month loan at an APRof 14.9 %. The loan has a 1.3 % loan origination​ fee, which againH2M will need to borrow to cover.

Answer & Explanation Solved by verified expert
3.7 Ratings (570 Votes)
Alternative A Discount D 24 Interest rate for n 40 10 30 days will be r D 1 D 24 1 24 002459 Hence effective annual rate 1 r365n 1 1 002459365 30 1 3439 Alternative B Disbursement required amount    See Answer
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