The R. Morin Construction Company needs to borrow $120,000 to help finance the cost of a new $180,000 hydraulic crane used in the firms commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase:

Alternative A. The firms bank has agreed to land $120,000 at a rate of 12%. Interest would be discounted, and a 15% compensating balance would be required. However, the compensating balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $30,000 in the bank.

Alternative B. The equipment dealer has agreed to finance the equipment with a 1-year loan. The $120,000 loan requires payment of principal and interest totaling $138,936.

a. which alternative should Morin select?

b. If the banks compensating-balance requirement had necessitated idle demand deposits equal to 15% of the loan, what effect would this have had on the cost of the bank loan alternative?