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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

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 $12,000, but the supplier will give them a 2.4% discount if they pay by today (when the discount period expires). That is, they can either pay $11,712 today, or $12,000 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $11,712 in cash right now, it is considering three options:

Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $12,000 in one month.

Alternative B: Borrow the money from Bank A, which has offered to lend the firm $11,712 for one month at an APR (compounded monthly) of 12.1%. The bank will require a (no-interest) compensating balance of 4.8% of the face value of the loan and will charge a $95 loan origination fee, which means Hand-to-Mouth must borrow even more than the $11,712.

Alternative C: Borrow the money from Bank B, which has offered to lend the firm $11,712 for one month at an APR of 15.3% (compounded monthly). The loan has 1.2% loan origination fee.

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