BEL has been considering purchasing a new piece of equipment to manufacture B.R.B.

that may be the answer to its declining margins. The Toy Machine 3000 (TM 3000) is

new on the market, and it uses the latest technology in toy manufacturing.

The equipment costs are as follows:

purchase cost: $100,000

Reqd: BEL will need to determine how to finance the TM 3000 if the company decides to purchase it. Adam has requested that you analyze the financing proposals presented in the Appendix I. Calculate cost of borrowing for each proposal option below.

Appendix I

Financing proposals

1. Line of credit

BEL can acquire a line of credit from the bank. The loan bears interest at prime plus 2.8%. The prime lending rate is currently 3.5%, and BEL would pay interest only on the amount actually borrowed. The total maximum amount available on this line of credit is $200,000. The line of credit is callable on demand at the bank's option. The line of credit would be secured by the company's property, plant, and equipment.

2. Five-year term loan

The bank is also prepared to offer a $150,000 long-term loan secured by the company's new equipment purchase (the TM 3000). The term loan would be for five years and bear interest at 5.3%. Interest only is payable monthly, with the principal due at maturity in March 2024.

3. Loan from friend

Adam's friend, Harold Ryan, is willing to lend the company $100,000 interest-free in exchange for 0.5% of BEL's sales for five years. The principal is due at the end of five years.