Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $11,500,but the supplier will give them a 2.4% discount if they pay by today(when the discount period expires). That is, they can either pay $11,224 today, or $11,500 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $11,224 in cash right now, it is considering three options:
Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $11,500 in one month.
AlternativeB: Borrow the money from Bank A, which has offered to lend the firm $11,224 for one month at an APR(compounded monthly) of 12%. The bank will require a(no-interest) compensating balance of 5.3% of the face value of the loan and will charge a $95 loan origination fee, which means Hand-to-Mouth must borrow even more than the $11,224.
Alternative C: Borrow the money from Bank B, which has offered to lend the firm $11,224 for one month at an APR of 15% (compounded monthly). The loan has a 1.3% loan origination fee.