ABC is reviewing the credit terms it

receives from suppliers. BI can borrow

short

-term funds on its line of credit at 9% and is subject to tax at a rate of 35%. The

following are the proposals from BI's suppliers:

First Inc. is offer

ing

BI

a volume discount of 2% for making purchases of $5,000,000

of its products at a time, instead of BI's current purchases of $1,000,000 per month

for a total of $12,000,000 per year. In order to store the additional inventory

, BI will

need to rent more warehouse space,

which will cost $18,000 per month including insurance. Currently

, each order costs BI $23,500 in processing and shipping. The

new larger orders will cost $75,000 each for processing and shipping. Inventory will

be drawn down to zero before each new order is received.

Second Inc. is

offering BI

credit terms of 1/15, net 60.

Required:

Evaluate the two proposals. S

how calculations, state your conclusions and provide a

recommendation for each

of the proposals

.