The R. Morin Construction Company needs to borrow $90,000 to help finance the cost of a new $135,000 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 $90,000 at a rate of 13 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 $22,500 in the bank.

Alternative B.The equipment dealer has agreed to finance the equipment with a1-year loan. The $90,000 loan requires payment of principal and interest totaling $104,985.

a. Which alternative should Morinselect?

b. If thebank's compensating-balance requirement had necessitated idle demand deposits equal to 16 percent of theloan, what effect would this have had on the cost of the bank loanalternative?