(Cost ofshort-term financing) The R. Morin Construction Company needs to borrow $100 comma 000

100,000 to help finance the cost of a new $140 comma 000

140,000 hydraulic crane used in thefirm's commercial construction business. The crane will pay for itself in 1year, and the firm is considering the following alternatives for financing itspurchase:

Alternative Along dash

The firm's bank has agreed to lend the $100 comma 000

100,000 at a rate of 14

14 percent. Interest would bediscounted, and a 16

16 percent compensating balance would be required.However, thecompensating-balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit(checking account) balance of $ 25 comma 000

$25,000 in the bank.

Alternative Blong dash

The equipment dealer has agreed to finance the equipment with a1-year loan. The $100 comma 000

100,000 loan would require payment of principal and interest totaling $116 comma 410

116,410.

a. Which alternative should R. Morinselect?

b. If thebank's compensating-balance requirement were to necessitate idle demand deposits equal to 16

16 percent of the loan, what effect would this have on the cost of the bank loanalternative?