Hand-to-Mouth (H2M) is currentlycash-constrained, and must make a decision about whether to delay paying one of itssuppliers, or take out a loan. They owe the supplier $12,500 with terms of 2.4/10 Net40, so the supplier will give them a 2.4% discount if they pay by today(when the discount periodexpires). Alternatively, they can pay the full $12,500 in one month when the invoice is due. H2M is considering threeoptions:

AlternativeA: Forgo the discount on its trade creditagreement, wait and pay the full $12,500 in one month.

AlternativeB: Borrow the money needed to pay its supplier today from BankA, which has offered aone-month loan at an APR of 12.4%. The bank will require a(no-interest) compensating balance of 4.9% of the face value of the loan and will charge a $95 loan origination fee. Because H2M has nocash, it will need to borrow the funds to cover these additional amounts as well.

AlternativeC: Borrow the money needed to pay its supplier today from BankB, which has offered aone-month loan at an APR of 14.8%. The loan has a 1.2% loan originationfee, which again H2M will need to borrow to cover.