Gallinger Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. The money can be obtained from the bank at an interest rate of 13 percent, discount interest; no compensating balance is required. Alternatively, Gallinger can finance the expansion by no longer taking discounts, thus increasing accounts payable. Gallinger purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days— paying in 65 days and thus becoming 35 days past due—without a penalty because of its suppliers’ current excess capacity problems.
a. Based strictly on effective annual interest rate comparisons, how should Gallinger finance its expansion?
b. What additional qualitative factors should Gallinger consider before reaching a decision?