The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in thefirm's commercial construction business. The crane will pay for itself in oneyear, and the firm is considering the following alternatives for financing itspurchase:

Alternative A.Thefirm's bank has agreed to lend the $100,000 at a rate of 12 percent. Interest would bediscounted, and a 16 percent compensating balance would be required.However, thecompensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit(checking account) balance of $25,000 in the bank.

Alternative B.The equipment dealer has agreed to finance the equipment with a1-year loan. The $100,000 loan requires payment of principal and interest totaling $116,260.

a. Which alternative should Morinselect?

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

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

a. The cost of Alternative A would be _____%. (Round to two decimalplaces.)