A firm is choosing among three alternative bank loans.

The firm wishes to minimize the borrowing costs on a

$200,000 borrowing.

Analyze the cost of each of these alternatives:

a.

An 18% rate of interest with interest paid at year-end and no compensating balance requirement.

b.

A 16% rate of interest but carrying a 20% compensating balance requirement.

This loan also calls for

interest to be paid at year-end.

c.

A 14% rate of interest that is discounted, plus a 20% compensating balance requirement.