(Cost of short-term financing) The R. Morin Construction Company needs to borrow $90,000 to help finance the cost of a new $126,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following alternatives for financing its purchase:

Alternative A-The firm's bank has agreed to lend the $90,000 at a rate of 13 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However, the compensating-balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit (checking account) balance of $22,500 in the bank.

agreed to finance the equipment with a 1-year loan. The $90,000 loan would require payment of principal and interest totaling $104,877

a. Which alternative should R. Morin select?

b. If the bank's compensating-balance requirement were to necessitate idle demand deposits equal to 15 percent of the loan, what effect would this have on the cost of the bank loan alternative?

a. Which alternative should R. Morin select?

The cost of alternative A would be 14.94 %. (Round to two decimal places.)

The cost of alternative B would be 16.53 %. (Round to two decimal places.)

Therefore, R. Morin Construction Company should select alternative A for financing its purchase. (Select from the drop-down menu.)

b. If the bank's compensating-balance requirement were to necessitate idle demand deposits equal to 15 percent of the loan, what effect would this have on the cost of the bank loan alternative?

The new cost of alternative A (bank loan alternative) would be

% (Round to two decimal places.)

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(Cost of short-term financing) The R. Morin Construction Company needs to borrow $90,000 to help finance the cost of a new $120.000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following alternatives for financing its purchase Alternative A-The firm's bank has agreed to lend the $90,000 at a rate of 13 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However, the compensating balance requirement would not be binding on R. Morin because the firm nomally maintains a minimum demand deposit (checking account balance of $22.500 in the bank. Alternative - The equipment dealer has agreed to finance the equipment with a 1year loan. The $90,000 loan would require payment of prow and interest totaling $104,877 a. Which temative should R. Morin select? b. If the bank's compensating balance requirement were to necessitat de demand deposits equal to 15 percent of the loan what effect would this have on the cost of the bank loan alternative? a. Which hamnative should R. Morin select? The cost of alternative A would be 14.94%. (Round to two decimal places) The cost of alterative would be 16,53% (Round to two decimal places) Therefore, Morin Construction Company should select heative for financing its purchase. (Select from the drop down menu. b. The bank's compensating balance requirement were to state de demand deposits equal to 15 percent of the low, what effect would this have on the cost of the bank loan alternative? The new cost of atomutive A burkoan shemative) would be (Round to two decimal places)