Christine Levine is the manager of the Instant Paper Clip Office Supply Company in Louisville. The company attempts to gain anadvantage over its competitors by providing quality customer service, which includes prompt delivery of orders by truck or van and always being able to meet customer demand from its stock. In order to achieve this degree of customer service, it must stock a large volume of items on a daily basis at a central warehouse and at three retail stores in the city and suburbs. Christie maintains these inventory levels by borrowing cash on a daily basis from the First American Bank. She estimates that for the coming fiscal year, the demand for the cash topay for inventory will be $17,000 per day for 305 working days. Any moneyshe borrows during the year must be repaid with interest by the end of theyear. The annual interest currently charged by the bank is 9%. Any timeChristie takes out a loan to purchase inventory, the bank charges the companya loan origination fee of $1200 plus two and a quarter points (2.25% of theamountborrowed).Christie often uses EOQ(economic order quantity) analysis to determine optimal amount of inventory toorder for different office supplies. Now she is wondering if she can use thesame type of analysis to determine an optimal borrowing policy.

a)Determine the amount of the loan Christie should borrow from the bank, thetotal annual cost of the companys borrowing policy, and the number ofloans the company should obtain during the year. Also determine the levelof cash on hand at which the company should apply for a new loan giventhat it takes 15 days for a loan to be processed by the bank.

b)Suppose the bank offers Christie a discount asfollows. On any loan amount equal to or greater than $500,000 the bank willlower the number of points charged on the loan origination fee from 2.25%to 2.00%. What would be the companys optimal amount borrowed.