Vitra Glass Company needs to borrow $150,000 to help financethe cost of a new $225,000 kiln to be used in the production ofglass bottles. The kiln will pay for itself in one year, andthe firm is considering the following alternatives for financingits purchase:

A. The firm's bank has agreed to lend the $150,000 at a rateof 15 percent. Interest would be discounted, and a 16%compensating balance would be required. However, thecompensating balancd requirement would not be binding on Vitra,because the firm normally maintaining a minimum demand deposit(checking account) balance of $25,000 in the bank.

B. The kiln dealer has agreed to finance the equipment with aone-year loan. The $150,000 loan would require payment ofprincipal and interest totaling $180,000.

Which alternative should Vitra select?

If the bank's compensating balance requirement were tonecessitate idle demand deposits equal to 16% of the loan, whateffect would this have on the cost of the bank loanalternative?