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can someone please show me the workout to reach the interest rate per period and effective annual cost for each alternative? The answer is here
can someone please show me the workout to reach the interest rate per period and effective annual cost for each alternative? The answer is here but I cannot figure out the workout
Problem 20-8 Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $10,000, but the supplier will give them a 2% discount if they pay by today (when the discount period expires). That is, they can either pay $9,800 today, or $10,000 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $9800 in cash right now, it is considering three options: Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $10,000 in one month. Alternative B: Borrow the money from Bank A, which has offered to lend the firm $9,800 for one month at an APR (compounded monthly) of 12%. The bank will require a (no-interest) compensating balance of 5% of the face value of the loan and will charge a $100 loan origination fee, which means Hand-to- Mouth must borrow even more than the $9,800. Alternative C: Borrow the money from Bank B, which has offered to lend the firm $9,800 for one month at an APR of 15% (compounded monthly). The loan has a 1% loan origination fee. Alternative A: Interest rate per period: Effective annual cost: 2.041% 27.435% 0.2743 Alternative B: Interest rate per period: Effective annual cost: 2.084% 28.080% Alternative C: Interest rate per period: 2.273% Effective annual cost: 30.954% Conclusion: Thus, Alternative A is the cheapest source of financingStep by Step Solution
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