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 $11,500 with terms of 1.8?/10 Net? 40, so the supplier will give them a 1.8% discount if they pay by today? (when the discount period? expires). ? Alternatively, they can pay the full $11,500 in one month when the invoice is due. H2M is considering three? options:
What is the cost for one month in each alternative?
Alternative? A: Forgo the discount on its trade credit? agreement, wait and pay the full $11,500 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%. The bank will require a? (no-interest) compensating balance of 5.1% of the face value of the loan and will charge a $100 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 14.5%. The loan has a 0.8% loan origination? fee, which again H2M will need to borrow to cover.
Which alternative is the best option?