(Calculating the cost of? short-term financing) The R. Morin Construction Company needs to borrow ?$100,000 to help finance the cost of a new ?$150,000 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 ?$100,000 at a rate of 13 percent. Interest would be? discounted, and a 16 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 ?$25,000 in the bank.
Alternative B. The equipment dealer has agreed to finance the equipment with a? 1-year loan. The ?$100,000 loan requires payment of principal and interest totaling ?$117,430.
a. Which alternative should Morin? select?
b. If the? bank's compensating-balance requirement had necessitated idle demand deposits equal to16 percent of the? loan, what effect would this have had on the cost of the bank loan? alternative?