Hand to Mouth (H2M) is currently cash constrained, and mustmake a deci...

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

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Finance

Hand-to-Mouth (H2M) is currentlyâ€‹ cash-constrained, and mustmake a decision about whether to delay paying one of itsâ€‹suppliers, or take out a loan. They owe the supplier $ 12 comma 500with terms of 2.4â€‹/10 Netâ€‹ 40, so the supplier will give them a 2.4% discount if they pay by todayâ€‹ (when the discount periodâ€‹expires). â€‹ Alternatively, they can pay the full $ 12,500 in onemonth when the invoice is due. H2M is considering threeâ€‹options:
Alternativeâ€‹ A: Forgo the discount on its trade creditâ€‹agreement, wait and pay the full $ 12,500 in one month.
Alternativeâ€‹ B: Borrow the money needed to pay its suppliertoday from Bankâ€‹ A, which has offered aâ€‹ one-month loan at an APRof 12.4 %. The bank will require aâ€‹ (no-interest) compensatingbalance of 4.6 % of the face value of the loan and will charge a $90 loan origination fee. Because H2M has noâ€‹ cash, it will need toborrow the funds to cover these additional amounts as well.
Alternativeâ€‹ C: Borrow the money needed to pay its suppliertoday from Bankâ€‹ B, which has offered aâ€‹ one-month loan at an APRof 14.9 %. The loan has a 1.3 % loan originationâ€‹ fee, which againH2M will need to borrow to cover.

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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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