Camworks, Inc. is currently trying to optmize its payables policy. The firm's vendors all offer terms of 1/10 net 30, meaning Camworks could take a 1% discount if it pays its accounts payable within 10 days of receiving invoices. If the firm does not pay by day 10, the invoices are due in full by day 30 at the latest. Camworks currently pays its invoices on day 33, which seems to satisfy the firm's vendors. Given Camworks cash flow situation, it could not easily pay by day 10. However, the firm's banker has suggested taking out a loan, secured by receivables, so Camworks could pay by day 10 and receive the discounts. This secured loan would have an interest rate of 9.5%. Camworks has no other debt, so this new loan would not add materially to the firm's risk.

a. What should Camworks do? Show whatever computations you need below to support your claim.

b. Camworks averages $25,000 of purchases per day. How big will the bank loan need to be?